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THE FOREIGN INVESTMENT CLIMATE IN CHINA:
PRESENT CHALLENGES AND POTENTIAL FOR REFORM
HEARING
BEFORE THE
U.S .-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
WEDNESDAY, January 28 , 2015
Prin ted for use of the
Uni ted States -China Economic and Securi ty Review Commission
Avai lab le v ia the World Wide Web: www.uscc .gov
UNITED STATES -CHINA ECONOMIC AND SECURITY REVIEW
COMMISSION
WASHINGTON: 2015
ii
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
Hon. WILLIAM A. REINSCH, Chairman
Hon. DENNIS C. SHEA, Vice Chairman
Commissioners:
CAROLYN BARTHOLOMEW DANIEL M. SLANE
ROBIN CLEVELAND SEN. JAMES TALENT
JEFFREY L. FIEDLER DR. KATHERINE C. TOBIN
SEN. CARTE P . GOODWIN MICHAEL R. WESSEL
MICHAEL R. DANIS, Execut ive Director
The Commission was created on October 30, 2000 by the Floyd D. Spence National Defense
Authorization Act for 2001 § 1238, Public Law No. 106-398, 114 STAT. 1654A-334 (2000)
(codified at 22 U.S.C. § 7002 (2001), as amended by the Treasury and General Government
Appropriations Act for 2002 § 645 (regarding employment status of staff) & § 648 (regarding
changing annual report due date from March to June), Public Law No. 107-67, 115 STAT. 514
(Nov. 12, 2001); as amended by Division P of the “Consolidated Appropriations Resolution,
2003,” Pub L. No. 108-7 (Feb. 20, 2003) (regarding Commission name change, terms of
Commissioners, and responsibilities of the Commission); as amended by Public Law No. 109-
108 (H.R. 2862) (Nov. 22, 2005) (regarding responsibilities of Commission and applicability of
FACA); as amended by Division J of the “Consolidated Appropriations Act, 2008,” Public Law
Nol. 110-161 (December 26, 2007) (regarding responsibilities of the Commission, and changing
the Annual Report due date from June to December); as amended by the Carl Levin and Howard
P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015, P.L. 113-291
(December 19, 2014) (regarding responsibilities of the Commission).
The Commission’s full charter is available at www.uscc.gov.
iii
March 16, 2015
The Honorable Orrin Hatch
President Pro Tempore of the Senate, Washington, D.C. 20510
The Honorable John A. Boehner
Speaker of the House of Representatives, Washington, D.C. 20515
DEAR SENATOR HATCH AND SPEAKER BOEHNER:
We are pleased to notify you of the Commission’s January 28, 2015 public hearing on “the
Foreign Investment Climate in China: Present Challenges and Potential for Reform.” The Floyd
D. Spence National Defense Authorization Act (amended by Pub. L. No. 109-108, section 635(a)
and amended by Pub. L. No. 113-291, Section 1259 B) provides the basis for this hearing.
At the hearing, the Commissioners received testimony from the following witnesses: Maureen K.
Ohlhausen, Commissioner, Federal Trade Commission; Mark A. Cohen, Special Counsel, U.S.
Patent and Trademark Office; Robert D. Atkinson, Ph.D., President, Information Technology and
Innovation Foundation; Dan Harris, Founder/Partner, Harris Moure; Written statement from Oded
Shenkar, Ph.D., Ford Motor Company Chair in Global Business Management, The Ohio State
University; Abbot (Tad) Lipsky, Jr., Partner, Latham & Watkins; Xiao-Ru Wang, Ph.D.,
Principal, Charles River Associates; William Kovacic, Global Competition Professor of Law and
Policy and Director, Competition Law Center, George Washington University Law School;
Written statement from Gil Kaplan, Partner, King & Spalding; Lucille Barale, Visiting Professor,
Georgetown University School of Law; Joshua Eisenman, Ph.D., Assistant Professor, University
of Texas at Austin, Lyndon Johnson School of Public Affairs and Senior Fellow for China
Studies, American Foreign Policy Council; and Scott Kennedy, Ph.D., Deputy Director, Freeman
Chair in China Studies and Director, Project on Chinese Business and Political Economy, Center
for Strategic and International Studies. The hearing assessed the most recent and pressing
challenges facing foreign firms operating in China, with a spotlight on China’s Anti-Monopoly
Law enforcement, and the potential for China’s planned reforms to create a more transparent,
cooperative, and fair environment for foreign investors.
We note that prepared statements for the hearing, the hearing transcript, and supporting
documents submitted by the witnesses are available on the Commission’s website at
www.USCC.gov. Members and the staff of the Commission are available to provide more
detailed briefings. We hope these materials will be helpful to the Congress as it continues its
assessment of U.S.-China relations and their impact on U.S. security.
The Commission will examine in greater depth these issues, and the other issues enumerated in its
statutory mandate, in its 2015 Annual Report that will be submitted to Congress in November
2015. Should you have any questions regarding this hearing or any other issue related to China,
please do not hesitate to have your staff contact our Congressional Liaison, Reed Eckhold, at
(202) 624-1496 or via email at [email protected].
Sincerely yours,
Hon. William A. Reinsch Hon. Dennis C. Shea
Chairman Vice Chairman
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CONTENTS
WEDNESDAY, JANUARY 28, 2015
THE FOREIGN INVESTMENT CLIMATE IN CHINA: PRESENT
CHALLENGES AND POTENTIAL FOR REFORM
Opening Statement of Chairman William A. Reinsch
(Hearing Co-Chair) .......................................................................................................01
Prepared Statement .........................................................................................................03
Opening Statement of Commissioner Daniel M. Slane
(Hearing Co-Chair) .......................................................................................................05
Prepared Statement .........................................................................................................06
Administration Panel: Assessing the Interface between China’s Competition and
Technology Licensing Policies
Administration Panel Introduction by Chairman William A. Reinsch
(Hearing Co-Chair) .......................................................................................................07
Statement of Maureen K. Ohlhausen
Commissioner, Federal Trade Commission ...................................................................08
Prepared Statement .........................................................................................................12
Statement of Mark A. Cohen
Special Counsel, U.S. Patent and Trademark Office ....................................................18
Prepared Statement .........................................................................................................21
Administration Panel: Question and Answer .....................................................................33
Panel I: Industry Perspectives on the Foreign Investment Climate in China
Panel I Introduction by Commissioner Daniel M. Slane
(Hearing Co-Chair) .......................................................................................................49
Statement of Robert D. Atkinson, Ph.D.
President, Information Technology and Innovation Foundation ...................................50
Prepared Statement .........................................................................................................54
Statement of Dan Harris
Founder/Partner, Harris Moure .....................................................................................65
Prepared Statement .........................................................................................................67
Panel I: Question and Answer............................................................................................79
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Panel II: The Legal and Regulatory Context for China’s Competition Law Enforcement
Panel II Introduction by Chairman William A. Reinsch
(Hearing Co-Chair) .....................................................................................................101
Statement of Abbot (Tad) Lipsky, Jr.
Partner, Latham & Watkins .........................................................................................103
Statement of Elizabeth Xiao-Ru Wang, Ph.D.
Principal, Charles River Associates ............................................................................106
Prepared Statement .......................................................................................................108
Statement of William Kovacic
Global Competition Professor of Law and Policy; Director, Competition Law Center,
George Washington University Law School ................................................................114
Prepared Statement .......................................................................................................117
Panel II: Question and Answer .......................................................................................127
Panel III: Evaluating the Impact of China’s Reforms on the Foreign Investment Climate
Panel III Introduction by Commissioner Daniel M. Slane
(Hearing Co-Chair) .....................................................................................................143
Statement of Lucille Barale
Visiting Professor, Georgetown University School of Law ........................................144
Statement of Joshua Eisenman, Ph.D.
Assistant Professor, University of Texas at Austin, Lyndon Johnson School of Public
Affairs, Austin, TX
Senior Fellow for China Studies, American Foreign Policy Council ..........................147
Prepared Statement .......................................................................................................150
Statement of Scott Kennedy, Ph.D.
Deputy Director, Freeman Chair in China Studies and Director, Project on Chinese
Business and Political Economy, Center for Strategic and International Studies ........159
Prepared Statement .......................................................................................................162
Panel III: Question and Answer ......................................................................................169
1
THE FOREIGN INVESTMENT CLIMATE IN CHINA: PRESENT CHALLENGES AND
POTENTIAL FOR REFORM
WEDNESDAY, JANUARY 28, 2015
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
Washington, D.C.
The Commission met in Room G-50 of Dirksen Senate Office Building, Washington, DC
at 8:30 a.m., Chairman William A Reinsch and Commissioners Daniel M. Slane (Hearing Co-
Chairs), presiding.
OPENING STATEMENT OF CHAIRMAN WILLIAM A. REINSCH
HEARING CO-CHAIR
CHAIRMAN REINSCH: Good morning everybody, and welcome to the f i rs t
hearing of the U.S. -China Economic and Securi ty Review Commission 's
2015 Annual Report cycle . We're s tar t ing off in f ine s tyle in th is
magni f icent enormous room. I don 't think we 're going to have an SRO
crowd but , in any event , we ' re glad you 're here , and you 're al l welcomed.
We also encourage our audience to at tend other hearings throughout
the year . Speaking of which, our next hear ing wil l be on February 18, and
i t wi l l examine China 's space and counterspace program s. Future hearing
topics th is year include China -Cent ral Asia relat ions, China 's of fens ive
missi le forces , and China 's 13th Five -Year Plan .
More informat ion about the Commission, i t s Annual Report , and i t s
hearings is avai lable on the Commission 's Web s i te at www.USCC.gov.
Today's hearing wil l seek to assess the most recent and pressing
chal lenges facing foreign f i rms operat ing in China with a spot l ight on
China 's Ant i -Monopoly Law enforcement . This hearing wi l l al so seek to
evaluate the potent ial for China 's p lanned reforms to create a more
t ransparent , coopera te and fai r envi ronment for foreign investors .
Throughout 2014, foreign companies across the Uni ted States , Europe
and Asia have issued a growing number of complain ts with regard to the
operat ing environment in China. Some of the ir concerns , l ike s t i f fer
compet i t ion f rom Chinese companies and r i s ing labor cost s , a re routed in
China 's s lowing economic growth .
Perhaps more di s t ress ing are recent complaints f rom fore ign bus inesses
with regard to t hei r t reatment by Chinese regulators . As reported by
numerous bus iness groups this year , thei r concerns range f rom increased
scrut iny and regula tory enforcement to procedural and due process
shortcomings.
Some foreign companies worry that increased Chinese regulatory
2
act iv i t i es have seemed to focus di sproport ionately on foreign investors ,
put t ing them at a di sadvantage compared to domest ic f i rms.
However , we note there are d if fer ing v iews to be considered in
evaluat ing China 's implementat ion and enforcement of ru les governing
foreign inves tment , some of which we look forward to hear ing today.
To help us bet ter understand the complexi ty of this is sue, we are
joined by a number of experts f rom the adminis t ra t ion, industry, l egal and
academic f ields . We look forward to hearing from each of you.
Let me now turn to the hearing co -chai r , Commissioner Dan Slane, for
his opening remarks , and then I ' l l int roduce the adminis t rat ion panel .
Dan.
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PREPARED STATEMENT OF CHAIRMAN WILLIAM A. REINSCH
HEARING CO-CHAIR
Hearing on the Foreign Investment Climate in China:
Present Challenges and Potential for Reform
Opening Statement of Chairman William A. Reinsch
January 28, 2015
Washington, DC
Good morning, and welcome to the first hearing of the U.S.-China Economic and Security Review
Commission’s 2015 Annual Report cycle. As this year's Chairman, I want to thank you all for
joining us today. We appreciate your attendance and we encourage you to attend our other hearings
throughout the year.
Our next hearing on February 18 will examine China’s space and counterspace programs. Future
hearing topics this year include China-Central Asia relations, China’s offensive missile forces, and
China’s 13th Five-Year Plan. More information about the Commission, its annual report, and its
hearings is available on the Commission's website at www.USCC.gov.
Today’s hearing will seek to assess the most recent and pressing challenges facing foreign firms
operating in China with a spotlight on China’s Anti-Monopoly Law enforcement. This hearing
will also seek to evaluate the potential for China’s planned reforms to create a more transparent,
cooperative, and fair environment for foreign investors.
Throughout 2014, foreign companies across the United States, Europe, and Asia have issued a
growing number of complaints with regard to the operating environment in China. Some of their
concerns, like stiffer competition from Chinese companies and rising labor costs, are rooted in
China’s slowing economic growth.
Perhaps more distressing are recent complaints from foreign businesses with regard to their
treatment by Chinese regulators. As reported by numerous business groups this year, their concerns
range from increased scrutiny and regulatory enforcement to procedural and due process
shortcomings. Some foreign companies worry that increased Chinese regulatory activities have
seemed to focus disproportionately on foreign investors, putting them at a disadvantage compared
to domestic firms.
However, we note there are differing views to be considered in evaluating China’s implementation
and enforcement of rules governing foreign investment, some of which we look forward to hearing
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today.
To help us better understand the complexities of this issue, we are joined by a number of experts
from the Administration, industry, legal, and academic fields. We look forward to hearing from
each of you.
Let me now turn to hearing co-chair Commissioner Dan Slane for his opening remarks.
5
OPENING STATEMENT OF COMMISSIONER DANIEL M. SLANE
HEARING CO-CHAIR
HEARING CO-CHAIR SLANE: Thank you, Chairman Reinsch, and good
morning to everyone.
I 'd l ike to begin by thanking Senator Deb Fischer and the Senate Rules
Commit tee for secur ing thi s room for us today.
One of our panels this morning wi l l seek to evaluate China 's
implementat ion and enforcement of i ts Ant i -Monopoly Law. By
internat ional s tandards , ant i t rust l aws should protect compet i t ion by
prevent ing undue concentrat ion of market power and abuse of market
dominance. While China has indeed used i ts Ant i -Monopoly Law to achieve
this goal , foreign f i rms and business groups have complained that China 's
recent enforcement act iv i t i es appear to promote the countr y 's indust r ial
pol icy goals a t the expense of foreign f i rms .
Over the las t year or so, fore ign companies have been forced to cut
prices or cap technology l icensing fees without conclus ive evidence of
ant icompet i t ive conduct under threat of invest igat ions to the benef i t of
Chinese nat ional champions in s t ra tegic indust r ies .
The resu l t ing envi ronment does not protect compet i t ion but rather
promotes protect ionism and discriminat ion.
Today, our expert wi tnesses wil l help shed l ight on the role of
internat ional pol icy and other noncompet i t ive factors in China 's
enforcement and implementat ion of the Anti -Monopoly Law and other laws
affect ing foreign investments .
We also wil l d iscuss how U.S. and China 's regulatory authori t i es are
working together to bring Ch ina 's ant i t rust enforcement closer in l ine with
internat ional l egal s tandards .
We wil l hear from exper ts on the f i rs t three panels before adjourning
for a lunch break at 12:45. After lunch, we wil l reconvene in th is room at
1:45 for the f inal panel , whic h wil l focus on the impact of China 's recent
and p lanned reforms on the foreign investment regime.
Final ly, I 'd l ike to thank members of our s taf f , Lauren Gloudeman and
Paul Magnusson, for their hard work on pul l ing this hear ing together . I ' l l
now turn to the Chairman to in t roduce the adminis t rat ion 's panel .
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PREPARED STATEMENT OF COMMISSIONER DANIEL M. SLANE
HEARING CO-CHAIR
Hearing on the Foreign Investment Climate in China:
Present Challenges and Potential for Reform
Opening Statement of Commissioner Daniel Slane
January 28, 2015
Washington, DC
Thank you, Chairman Reinsch, and good morning, everyone. I would like to begin by thanking
Senator Deb Fischer and the Senate Rules Committee for securing this room for us today.
One of our panels this morning will seek to evaluate China’s implementation and enforcement of
its Anti-Monopoly Law. By international standards, antitrust law should protect competition by
preventing undue concentrations of market power and abuse of market dominance. While China
has indeed used its Anti-Monopoly Law to achieve this goal, foreign firms and business groups
have complained that China’s recent enforcement activities appear to promote the country’s
industrial policy goals at the expense of foreign firms.
Over the last year or so, foreign companies have been forced to cut prices or cap technology
licensing fees without conclusive evidence of anticompetitive conduct under threat of
investigations to the benefit of Chinese national champions in strategic industries. The resulting
environment does not protect competition, but rather promotes protectionism and discrimination.
Today, our expert witnesses will help shed light on the role of industrial policy and other non-
competition factors in China’s enforcement and implementation of the Anti-Monopoly Law and
other laws affecting foreign investors. We’ll also discuss how U.S. and Chinese regulatory
authorities are working together to bring China’s antitrust enforcement closer in line with
international legal standards.
We will hear from experts on the first three panels before adjourning for a lunch break at 12:45.
After lunch, we will reconvene in this room at 1:45 for the final panel, which will focus on the
impact of China’s recent and planned reforms on the foreign investment regime.
Finally, I’d like to thank members of our staff, Lauren Gloudeman and Paul Magnusson, for their
hard work on pulling this hearing together. I’ll turn now to the Chairman to introduce the
Administration panel.
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ADMINISTRATION PANEL INTRODUCTION BY CHAIRMAN WILLIAM A.
REINSCH
CHAIRMAN REINSCH: Thank you.
In our f i rs t panel th is morning, we ' l l di scuss U.S. government
engagement with China on i ts Ant i -Monopoly Law enforcement ac t ivi t i es ,
as wel l as the impact of China 's intel lec tual property pol icies on i t s
enforcement of compet i t ion law.
We're p leased to welcome Maureen Ohlhausen , who was sworn in as a
Commissioner of the Federal Trade Commission on Apri l 4 , 2012. P rior to
joining the FTC, Commissioner Ohlhause n was a partner a t Wilkinson
Barker Knauer where she focused on FTC issues , including compet i t ion law,
privacy and technology pol icy.
She previous ly served a t the FTC for over a decade, most recent ly a t
tha t t ime as Di rector of the Office of Pol icy Planni ng where she led the
FTC's Internet Access Task Force .
Next we welcome Mark Cohen. Mr. Cohen serves as Senior Counsel to
the U.S. Patent and Trademark Office. He re joined USPTO as Advisor to
the Under Secre tary and la ter as Senior Counsel for China in t he Office of
Pol icy and In ternat ional Affai rs in 2012 after serv ing as a v is i t ing professor
at Fordham Law School .
Prior to that t ime, he served as Director , Internat ional In tel lectual
Property Pol icy a t Microsoft , Of Counsel to Jones Day's Bei j ing off ice , and
Senior Intel lectual Property Attaché at the U.S. Embassy in Bei j ing.
In total , he has over 30 years pr ivate, publ ic sec tor , in -house and
academic exper ience in China and t rans i t ion economies with a principal
focus on technology t rade and in te l lectua l property.
So we have two people here who are c learly experts in the f ield and
also wel l -placed by vir tue of thei r current ass ignments to take up today's
topic. We're honored to have both of you here and look forward to your
tes t imony. We are hoping to have you conf ine yourse lves to seven minutes
each. Your fu l l s tatements wil l be put in the record, and then that wi l l leave
plenty of t ime for quest ions .
Commissioner Ohlhausen, we ' l l s tar t wi th you, and then we ' l l do Mr.
Cohen next , and then we ' l l have ques t ions af ter you both conclude. Go
ahead .
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OPENING STATEMENT MAUREEN K. OHLHAUSEN
COMMISSIONER, FEDERAL TRADE COMMISSION
MS. OHLHAUSEN: Good morning. Thank you to the Commission for
invi t ing me to tes t i fy today, though I do want to ment ion that my remarks
are just my own and not those of the Federal Trade Commission .
I want to focus my remarks th is morning on China 's AML enforcement
and some of the recent developments spurred in part by cont inued
engagement of U.S . of f icials with thei r Chinese c ounterpart s as wel l as with
prominent Chinese academics and pract i t ioners .
Over the las t few years , we 've seen a s igni f icant ramp -up in Chinese
ant i t rus t enforcement , including agains t Western companies , which has
highl ighted many of the di fferences betwe en the Chinese regime and others
in the world .
A number of cr i t i cs , including American businesses , c la im that China
is using i ts ant i t rust law to promote indust r ial pol icy and domest ic
compet i tors . Because China is a l eading global economic power, howeve r,
i t i s in our mutual interest to f ind a way to move forward harmoniously and
frui t fu l ly.
It i s for these reasons that I have made engagement with China a top
prior i t y. Since becoming a commissioner, I 've t raveled to China f ive t imes,
part icipated in bi latera l t alks with the Chinese here in the United States ,
and hosted top Chinese enforcers on severa l occasions. In these
discussions , I 've repeatedly ex tol led the values of predictab i l i t y, fai rness
and t ransparency in enforcement and out l ined s ix ac t iona ble goals for
compet i t ion agencies:
Fi rs t , compet i t ion -based factors should guide pol icy and enforcement
decis ions;
Second, industr ia l organizat ion economics should form the foundat ion
for agency act ions;
Thi rd , compet i t ion regimes should abide by commo nly-accepted best
pract ices including those developed by voluntary organizat ions l ike the
In ternat ional Compet i t ion Network, or ICN;
Fourth , compet i t ion agencies should afford part ies fundamenta l due
process , including the r ight to a defense, the r ight to local and internat ional
counsel of thei r choosing, not i f ica t ion of the legal and factual basi s of an
invest igat ion, and meaningful engagement with agency s taf f and decis ion -
makers;
Fi f th , t ransparency into agency analyses and act ions is cr i t ical for
promot ing sel f -regulat ion and honoring due process r ights of part ies ;
Six th, and f inal ly, compet i t ion agencies should coopera te with thei r
counterparts in ternat ional ly.
During my d iscussions in and about China , people have told me that
whi le the Chinese l ook to more mature compet i t ion agencies for guidance,
they are focused on creat ing an enforcement program with "Chinese
characteri s t ics . " Over t ime, I 've come to rea l ize that "Chinese
9
characteri s t ics" may include, as a pract ical mat ter , relying on non -
compet i t ion factors to examine mergers , acquis i t ions and conduct with an
eye to promoting domest ic indust ry.
In fact , China 's AML, i tsel f sa id to have Chinese characteri s t ics ,
expl ici t l y provides for the considerat ion of non -compet i t ion factors such as
protect ing social publ ic interest and promoting the heal thy development of
the socia l is t market economy.
With respect to merger rev iew in par t icular , the AML provides that
when reviewing a t ransact ion , China 's Minis t ry of Commerce, or MOFCOM,
should consider f actors such as the influence of the concentrat ion of
business operators on nat ional economic development .
In addi t ion, Chinese characteris t ics could mean encouraging immediate
economic gains by extract ing addi t ional value f rom intel lec tual property by
reducing the protect ion of intel lectual property r ights , part icularly the r ight
of exclusion. We are hearing a lot of cr i t ic ism of Chinese act ions in these
areas .
Impor tant ly, and on a posi t ive note, we appear to be seeing a serious
response to U.S. governm ent engagement by Chinese enforcers that could
s ignal improvement in their approach to these issues . It ' s a lso appropr ia te
to recognize that the concerns with AML enforcement in China are not
unique. Many new ant i t rus t regimes face l imits on s taf f and th ei r
experience , as is the case in China , al though wi th China the importance of
our economic relat ionships makes get t ing past these l imitat ions al l the more
importan t .
Let me elaborate a few minutes on each of these points . As I
ment ioned a minute ago, Ch ina 's AML expressly provides for considerat ion
of non-compet i t ion fac tors . As I 'm sure you 'l l hear later today, many
observers and indus try part icipants bel ieve that the Chinese government has
enforced the AML to promote and protect Chinese indust ry in ce r ta in cases .
The U.S . Chamber of Commerce and the U.S. -China Business Counci l
i ssued cr i t i cal repor ts a few months ago on the s tate of compet i t ion
enforcement in China.
A second topic of concern i s China 's approach to i ssues at the
intersect ion of the a nt i t rust and intel lec tual property laws, including
l icensing pract ices and s tandard -essent ial patents . I bel ieve in s t rong
intel lectual property pro tect ion to promote innovat ion and consumer gains
in any count ry. China has been explor ing how to apply the AML to
intel lectual property r ights . It appears to be moving to a system that favors
short - term economic gain f rom reduced intel lectual property pro tect ions,
inc luding the r ight to exclusion and to fai r compensat ion based on f ree
negot iat ion of l i censing terms and marketp lace compet i t ion.
For instance, MOFCOM has reached merger set t l ements in recent years
in which i t has mandated Fai r , Reasonable and Non -Discriminatory, or
FRAND, commitments on patents that are not essent ia l to an indust ry
s tandard . This i s di fferent from our pract ice in the U.S .
In addi t ion, a t a pol icy level , the State Adminis t rat ion for Indust ry and
10
Commerce , SAIC, has been working on IP guidel ines s imilar to those the
FTC and DOJ i ssued in the 1990s and seeking publ ic comments .
Some aspects of these proposals ref lect internat ional norms. For
example, SAIC removed a sugges t ion in an early draft that patent pools ,
which are t ypical ly evaluated under the rule of reason here, are
presumptively unlawful .
Other features of the proposed rules could serve to devalue IP r ights ,
however , which wil l be fel t mos t acutely by IP - intensive Western
businesses . For example, SAIC intends to apply the essent ial faci l i t i es
doct r ine to intel lectual proper ty r ights , a doct r ine that has faced serious
cr i t i cism by the Supreme Court in the United States and has yet to be
appl ied to patents anywhere in the wor ld.
In addi t ion, many people are concerned about SAIC 's proposals to
impose l i ab i l i t y on a patentee based on royal ty terms i t demands on
essent ial patents , including patents not voluntari l y contr ibuted by the owner
to a s tandard set t ing body.
This would expand l iab i l i t y to patentees not subject to FRAND
l icensing obl igat ions commonly imposed by s tandard -set t ing bodies on
cont r ibuted technology that becomes part of the s tandard.
Moreover, China has elsewhere taken a s imilar view of imposing
FRAND requi rements on SEP holders in other pol ic ies and rules . As FTC
Chairwoman Ramirez pointed out in a speech las t year , imposing l iabi l i t y
on patent holders who have not made a FRAND commitment or premising
ant i t rus t l i abi l i t y so lely on royal ty terms, for example , excessive pricing in
the absence of any evidence of hold -up, is a break f rom pract ice at the FTC,
the DOJ and Europe.
My exper ience deal ing with Ch inese off icial s provides me with three
insights tha t may help the government and bus iness to engage them
effect ively over the coming years .
Fi rs t , cont inued d ia logue and cooperat ion at al l l evels of the federal
government can have a posi t ive impact . Thus , for example, this past year 's
U.S .-China Joint Commission on Commerce and Trade, or JCCT, resul ted in
Chinese commitments of increased abi l i t y of counsel to at tend meet ings
with the AML enforcement agencies , more t ransparent penal ty procedures ,
and compet i t ion-based remedies .
These resul ts would not have come about without cont inuous and
determined engagement by federa l of f icials on these i ssues . This is a
notable advance, and i t i s merely one example of the FTC's cooperat ion
with o ther U.S. government agencies .
More broadly, the U.S. ant i t rust agencies ' dialogue with China 's
ant imonopoly enforcers and others s t retches back to before the AML was
passed . Since the AML's passage, we 've conducted a robust program of
technical ass is tance to share with China 's new enforcers our best
substant ive and procedural pract ices for an t i t rus t enforcement .
We've also estab l ished a regular senior - level dialogue through a
memorandum of understanding with China 's three AML enforcement
11
agencies . The combinat ion of these engagements , we bel ieve, has
cont r ibuted s igni f icant ly to put t ing much of China 's AML enforcement on
the r ight t rack even i f concerns cont inue regard ing aspects of that
enforcement .
A second insight I can offer is that shin ing a l ight on discrepancies or
biases in Chinese enforcement or compet i t ion pol icies can a lso be effect ive.
In response to the Chamber report , the Chinese ant i t rust agencies ' heads
responded with a joint press conference. They argued that thei r processes
are fai r , t ransparent and fol l ow regulat ions , and, of course, this press
conference was fo l lowed by the commitments made at the JCCT. These
act ions sugges t to me that China 's enforcers want to be accepted
internat ional ly as serious and disc ipl ined, and indeed thei r enthusiasm for
engaging with the FTC and DOJ, both in China and the Uni ted States , and
at ten t iveness to our experiences suggest a serious commitment to gaining
internat ional acceptance.
A thi rd and f inal l esson that I can share today is that American
enforcers need to be ve ry c lear about the reasons underlying our decis ions.
We must remember that we have an audience in China that can eas i ly
misunderstand, mis interpret or even misuse our act ions when they are
unclear .
I think our goal should be to carefu l ly explain our deci s ions and avoid
making decis ions that could be perceived as protect ionis t to prevent the
possibi l i t y of misunderstanding or misuse .
Thank you, and I look forward to your quest ions.
12
PREPARED STATEMENT OF MAUREEN K. OHLHAUSEN
COMMISSIONER, FEDERAL TRADE COMMISSION
United States of America
Federal Trade Commission
Hearing on “The Foreign Investment Climate in China:
U.S. Administration Perspectives on the Foreign Investment Climate in China”
Testimony of Maureen K. Ohlhausen1
Commissioner, Federal Trade
Commission
before the U.S.-China Economic and Security Review
Commission Dirksen Senate Office Building
Washington, DC 20510
January 28, 2015
Good morning. Thank you to the Commission for inviting me to testify today. I want to focus
my remarks this morning on China’s AML enforcement and some of the recent developments
spurred in part by continued engagement of U.S. officials with their Chinese counterparts as
well as with prominent Chinese academics and practitioners. Over the last few years we have
seen a significant ramp-up in Chinese antitrust enforcement, including against Western
companies, which has highlighted many of the differences between the Chinese regime and
others in the world. A number of critics, including American businesses, claim that China is
using its antitrust law to promote industrial policy and domestic competitors. Because China is
a leading global economic power, however, it is in our mutual interest to find a way to move
forward harmoniously and fruitfully.
It is for these reasons I have made engagement with China a top priority. Since becoming
Commissioner, I have traveled to China five times, participated in bilateral talks with the
Chinese here in the United States, and several months ago hosted top Chinese enforcers for an
informal breakfast in conjunction with the ABA Antitrust Spring Meeting. In these discussions,
I have repeatedly extolled the values of predictability, fairness, and transparency in
enforcement and outlined five actionable goals for competition agencies: First, competition-
based factors should guide policy and enforcement decisions. Second, industrial organization
economics should form the foundation for agency actions. Third, competition regimes
1 The views expressed in these remarks are my own and do not necessarily reflect the views of the Federal Trade
Commission or any other Commissioner.
13
should abide by commonly-accepted best practices, including those developed by voluntary
organizations like the International Competition Network or “ICN.” Fourth, competition
agencies should afford parties fundamental due process, including the right to a defense, the
right to local and international counsel of their choosing, notification of the legal and factual
basis of an investigation, and meaningful engagement with agency staff and decision makers.
Fifth transparency into agency analyses and actions is critical for promoting self-regulation
and honoring due process rights of parties. Sixth, and finally, competition agencies should
cooperate with their counterparts internationally.
During my many discussions in and about China, people have told me that while the Chinese
look to more mature competition agencies for guidance, they are focused on creating an
enforcement program with “Chinese characteristics.” Over time, I have come to realize that
“Chinese characteristics” may include, as a practical matter, relying on non-competition
factors to examine mergers, acquisitions, and conduct with an eye to promoting domestic
industry. In fact, China’s Anti-Monopoly Law or “AML,” itself said to have Chinese
characteristics, explicitly provides for the consideration of non-competition factors such as
protecting “social public interest” and “promoting the healthy development of the socialist
market economy.”2 With respect to merger review in particular, the AML provides that when
reviewing a transaction, China’s Ministry of Commerce, or “MOFCOM,” should consider
factors such as “the influence of the concentration of business operators on the national
economic development.”3 In addition, Chinese characteristics could mean encouraging
immediate economic gains by extracting additional value from intellectual property by
reducing the protection of intellectual property rights, particularly the right of exclusion. We
are hearing a lot of criticism of Chinese actions in these areas.
Importantly, and on a more positive note, we appear to be seeing a serious response to U.S.
government engagement by Chinese enforcers that could signal improvement in their
approach to these issues. It is also appropriate to recognize that the concerns with AML
enforcement in China are not unique. Many new antitrust regimes face limits on staff and
their experience, as is the case in China, although with China the importance of our economic
relationship makes getting past these limitations all the more important. Let me elaborate for
a few minutes on each of these points.
I. Application of Non-Competition Factors
As I mentioned a minute ago, China’s AML expressly provides for consideration of non-
competition factors. Subsequent to passage of the AML, the Legislative Affairs Commission of
the NPC Standing Committee issued a doctrine known as the “Three Musts,” to guide
enforcement of Article 4 of the AML.4 This doctrine includes a directive for the state to
2 Art. 1, China Anti-Monopoly Law (effective Aug. 1, 2008), available at
http://www.china.org.cn/government/laws/2009-02/10/content 17254169.htm. 3 Id. at Art. 27. 4 Translation of Legislative Affairs Commission, Interpretation of the Anti-Monopoly Law of the People’s
Republic
of China, Law Press China (2008) at 4, as found in U.S. Chamber of Commerce, Competing Interests in China’s
Competition Law Enforcement: China’s Anti-Monopoly Law Application and the Role of Industrial Policy at 24
(Sept. 9, 2014) (quoting same), available at
14
implement competition rules consistent with the socialist economy. These “musts” include
bearing “in mind the requirements to enlarge and strengthen, concentrate and improve the
market competitiveness of our enterprises, [and] macro-coordinate the relations between anti-
monopoly and the implementation of national industrial policies….”5
As I am sure you will hear later today, many observers and industry participants believe that the Chinese government has enforced the AML to promote and protect Chinese industry in certain cases. The U.S. Chamber of Commerce and the U.S.-China Business Council issued critical reports a few months ago on the state of competition enforcement in China. According to the USCBC report, “[C]oncerns raised by international observers during the AML drafting process – such as the role of industrial policy considerations in competition reviews, lack of due process, and insufficient transparency – remain relevant based on China’s initial enforcement efforts.”6
II. Antitrust and Intellectual Property
A second topic of concern is China’s approach to issues at the intersection of the antitrust and
intellectual property laws, including licensing practices and standard essential patents. I
believe in strong intellectual property protection to promote innovation and consumer gains
in any country. As the U.S. Supreme Court has said, strong intellectual property protection
creates “an incentive to inventors to risk the often enormous costs in terms of time, research,
and development. The productive effort thereby fostered will have a positive effect on society
through the introduction of new products and processes of manufacture into the economy….”7
China has been exploring how to apply the AML to intellectual property rights. It appears to
be moving to a system that favors short term economic gain from reduced intellectual
property protections, including the right to exclusion and to fair compensation based on free
negotiation of licensing terms and marketplace competition. For instance, MOFCOM has
reached merger settlements in recent years in which it has imposed “Fair, Reasonable, and
Non-Discriminatory” or FRAND commitments on patents that are not essential to an industry
standard. This is different from our practice in the United States.
In addition, at a policy level, the State Administration for Industry & Commerce (SAIC) has
been working on IP guidelines similar to those the FTC and DOJ issued in the 1990s8 and
seeking public comments. Some aspects of the proposals reflect international norms. For
example, SAIC removed a suggestion in an early draft that patent pools, which typically are
evaluated under the rule of reason here, are presumptively unlawful.9 Other features of the
https://www.uschamber.com/sites/default/files/aml_final_090814_final_locked.pdf [hereinafter Chamber Report]. 5 Id. 6 The U.S.-China Business Council, Competition Policy and Enforcement in China, 5 (Sept. 2014), available at http://uschina.org/reports/competition-policy-and-enforcement-china. 7 Kewanee Oil Co, v. Bicron Corp., 416 U.S. 470, 480 (1974). 8 U.S. Dep’t of Justice and Fed. Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property (1995), available at http://www.justice.gov/atr/public/guidelines/0558.htm. 9 American Bar Association Section of Antitrust Law, Section of Intellectual Property Law, and Section of
International Law, Joint Comments on the SAIC Draft Rules on the Prohibition of Abuses of Intellectual Property
Rights for the Purposes of Eliminating or Restricting Competition 6, July 9, 2014, available at
15
proposed rules could serve to devalue IP rights, however, which will be felt most acutely by
IP- intensive Western businesses. For instance, SAIC intends to apply the essential facilities
doctrine to intellectual property rights, a doctrine that has faced serious criticism by the
Supreme Court in the United States and has yet to be applied to patents anywhere in the
world. In addition, many people are concerned about SAIC’s proposals to impose liability on
a patentee based on royalty terms it demands on essential patents, including patents not
contributed voluntarily by the owner to a standard setting body. This would expand liability to
patentees not subject to FRAND licensing obligations commonly imposed by standard-setting
bodies on contributed technology that becomes part of a standard. Moreover, China has
elsewhere taken a similar view of imposing FRAND requirements on SEP holders in other
policies and rules. As FTC Chairwoman Ramirez pointed out in a speech last year, imposing
liability on patent holders who have not made a FRAND commitment or premising antitrust
liability solely on royalty terms, for example “excessive pricing” in the absence of any
evidence of hold-up, is a break from practice at the FTC, the DOJ, and Europe.10
III. Effective Federal Responses
My experience dealing with Chinese officials provides me with three insights that may help
the government and business to engage them effectively over the coming years. First,
continued dialogue and cooperation at all levels of the federal government can have a
positive impact.
Thus, for example, this past year’s U.S.-China Joint Commission on Commerce and Trade
(JCCT) resulted in Chinese commitments of increased ability of counsel to attend meetings
with the AML enforcement agencies, more transparent penalty procedures, and competition
based remedies. These results would not have come about without continuous and
determined engagement by federal officials on these issues. This is a notable advance, and it
is merely one example of the FTC’s cooperation with other U.S. government agencies.
These are issues that I and my colleagues and staff at the FTC, along with the Antitrust
Division at DOJ, have regularly raised in our dialogue with Chinese officials. In fact, the
staffs of our two agencies were directly and closely involved in the drafting and discussions
with China regarding these outcomes during the JCCT. Indeed, these commitments to take
steps to improve the fairness of China’s AML enforcement procedures, including greater
transparency and improved opportunities for parties to defend themselves, is welcome and
one of the most important improvements China (or any country) can make to enhance the
legitimacy of its antitrust enforcement activities.
More broadly, the U.S. antitrust agencies’ dialogue with China’s antimonopoly enforcers and
others stretches back to before the AML was passed, when we consulted with officials at
China’s State Council and National People’s Congress regarding the draft law and ways to
http://www.americanbar.org/content/dam/aba/administrative/antitrust law/at comments 201407saic.authcheckdam.
pdf. 10 Edith Ramirez, Chairwoman, Fed. Trade Comm’n, Standard-Essential Patents and Licensing: An Antitrust
Enforcement Perspective 8-9 (Sept. 10, 2014), available at
http://www ftc.gov/system/files/documents/public statements/582451/140915georgetownlaw.pdf.
16
make it more consistent with international norms. Since the AML’s passage we have
conducted a robust program of technical assistance to share with China’s new enforcers our
best substantive and procedural practices for antitrust enforcement and have frequently
submitted comments on draft implementing rules. We also established a regular senior-level
dialogue through a memorandum of understanding with China’s three AML enforcement
agencies. The combination of these engagements we believe has contributed significantly to
putting much of China’s AML enforcement on the right track, even if concerns continue
regarding aspects of that enforcement. For example, our dialogue has helped to move China
towards international best practices, including its decision last year to enact fast track rules for
simple merger transactions, which in its first several months has greatly reduced the typically
lengthy time for merger reviews for a sizable percentage of transactions. Similarly, as I
mentioned above, SAIC’s draft IP and AML rules have moved in many respects towards
approaches consistent with those used in the U.S., likely a result of comments we, along with
our colleagues in other agencies of the U.S. government, have provided to SAIC.
Second, shining a light on discrepancies or biases in Chinese enforcement or competition
policies also can be effective. In response to the Chamber report, the Chinese antitrust agency
heads responded with a joint press conference. They argued that their processes are fair,
transparent, and follow regulations.11 And, of course, this press conference was followed by
the commitments made in December at the JCCT that in many ways reflected the
characterizations of Chinese enforcement practices made by the antitrust agency heads. These
actions suggest to me that China’s enforcers want to be accepted internationally as serious and
disciplined. Indeed, their enthusiasm for engaging with the FTC and DOJ, both in China and
in the United States, and attentiveness to our experiences in enforcing our antitrust laws
suggests a serious commitment to gaining international acceptance. In addition, I know that
there are enforcers and other influential voices within China that want to see domestic
enforcement that is in line with international norms.
A third, and final, lesson that I can share today is that American enforcers need to be very
clear about the reasoning underlying our decisions. We must remember that we have an
audience in China that can easily misunderstand, misinterpret, or even misuse our actions
when they are unclear. For example, the FTC concluded a couple of matters in late 2012 and
early 2013, including with respect to Google/Motorola Mobility in which we placed
restrictions on the ability of patentees holding SEPs to seek injunctions.12 My concern with
those actions, in part, was that we could send the wrong message to our foreign counterparts
that we do not place a very high value on intellectual property rights and that we did not give
enough explanation about why those cases are the exception rather than the rule.
During a conference I attended in China, I heard a presentation on the U.S. and Chinese
11 Michael Martina & Xiaoyi Shao, Update 2-China’s Antitrust Regulators Defend Probes; Qualcomm Inquiry
Nearly Over REUTERS (Sept. 11, 2014) available at http://www.reuters.com/article/2014/09/11/china-
antitrust- idUSL3N0RC2MY20140911. 12 See In re Robert Bosch GmbH, FTC File No. 121-0081, Decision and Order, at 13-14 (Nov. 26, 2012)
[hereinafter Bosch D&O], available at http://www.ftc.gov/os/caselist/1210081/121126boschdo.pdf; In re Motorola
Mobility LLC and Google Inc., FTC File No. 121-0120, Decision and Order, at 6-12 (Jan. 3, 2013), available at
http://ftc.gov/os/caselist/1210120/130103googlemotorolado.pdf.
17
antitrust laws and the FTC’s decision in Google/Motorola Mobility came up. The lecturer
argued that the
U.S. has a strong essential facilities doctrine and then drew a line from this supposed
precedent, including the FTC’s Google/Motorola Mobility decision, and similar European
decisions, to the Chinese Anti-Monopoly Law and other Chinese laws that prohibit
unreasonable refusals to deal as to essential facilities. He argued that the FTC’s action meant
that an “unreasonable” refusal to grant a license for an essential patent to a competitor should
constitute monopolization under the essential facilities doctrine. The remedy, he implied,
should be compulsory licensing (presumably on favorable terms to the licensee) because that
would be the best way to facilitate competition among the licensees. This presenter did not in
my opinion state accurately the law in the United States, but may have read the law as he
wanted to see it or through a lens I do not entirely understand. Either way, it drove home the
point that enforcers and others within China are likely to advocate a version of antitrust
enforcement that suits their own national economic interest and is grounded in their own
cultural and legal norms. I think our goal should be to carefully explain our decisions and
avoid making decisions that could be perceived as protectionist to prevent the possibility of
misunderstanding or misuse.
I look forward to your questions. Thanks.
18
OPENING STATEMENT OF MARK A. COHEN
SPECIAL COUNSEL, U.S. PATENT AND TRADEMARK OFFICE
CHAIRMAN REINSCH: Thank you.
Mr. Cohen.
MR. COHEN: Thank you very much. I 'd l ike to thank the Commission
for invi t ing the U.S . Patent and Trademark Office to tes t i f y today.
My name is Mark Cohen. I 'm the Senior Counsel on China at the
USPTO, and I propose to di scuss IP abuse , IP enforcement and l icensing,
and the role of the USPTO. Due to t ime l imitat ions, I refer the Commission
to my wri t ten s tatement for furth er informat ion .
Many observers may f ind China 's current pol i t i ca l emphasis on IP
abuse a bi t hard to swal low. Whatever the defini t ion of IP abuse in the
Anti -Monopoly Law, another k ind of IP abuse that companies face involves
dif f icu l t ies in protect ing t hei r IP . In other words, an IP r ights holder
cannot abuse i ts IP r ights unless the holder can have suff icient IP r ights to
protect .
In the at tachment to my submission are two char ts that demonst rate
this t ype of IP abuse. As shown in Chart 1 , the averag e damage award in a
patent infr ingement lawsui t in China is about $10,000. This is hardly
enough to compensate for inf r ingement of a valuable invent ion. By
compar ison, in the U.S . , we ' re talking about $5 mi l l ion or more average
damages; in Europe, a l i t t le l ess than one mil l ion , just to give you a sense
of the order of magni tude of the di fference.
The second issue is the di f f icu l ty in l i censing to China . Chart 2 shows
total payments f rom China to the U.S. for royal t ies of various kinds. In
2012, thi s totaled approximately--U.S. dol lars - -f ive bi l l ion .
Chart 3 in the appendix shows the total royal ty payments f rom China to
the U.S. [s ic] for th is same per iod, about $10 bi l l ion.
As these chart s suggest , the U.S. receives only 50 percent of the
revenue from China on royal t ies compared to that received f rom Japan, yet
China export s four t imes more high -tech goods than Japan, which suggests
i t may be s igni f icant ly under - l icensed in high -tech IP .
Put another way, China 's payments of royal t ies accounted for 3 .6
percent of total U.S . royal t ies for indus tr ial processes and software in 2012
while China accounted for 19.2 percent of global high -tech exports in the
same year . This suggests a highly under - l icensed environment , and I 'd be
happy to provide th i s dat a to the Commission in the wri t ten submission or
supplement .
Reflec t ing these concerns, the U.S . government has repeatedly asked
Chinese authori t i es to increase the legi t imate sale of IP -intensive goods and
services and to af f i rm that thei r ant i t rus t ef fo rt s are in tended to encourage
compet i t ion and not protect ind ividual compet i tors or indust r ies .
The enforcement and l icensing of IP r ights has al so been of long
concern in China. Today a dispari t y is emerging between the damages
19
awarded in an t i t rus t inve st igat ion and the damages awarded in IP mat ters ,
which casts doubt on how much China values IP. As noted, average
damages f rom patent l i t iga t ion in China are about $10,000 per year , but IP -
related ant i t rust issues in China have caused proposed mergers to fal l apart
and have resul ted in threats of a bi l l ion or more dol lars in damages ,
l i te ral ly thousands of t imes average damages for patent inf r ingement .
These kinds of dispari t i es can encourage prospect ive l icensees in
China to cont inue to infr inge and r isk an adverse judicial decis ion in China
while a t the same t ime proact ively launch a Chinese Anti -Monopoly Law
case for even greater damages in appropriate ci rcumstances.
China 's increasingly dominant role as a consumer of t echnology or ,
hopeful ly, a purchaser of t echnology has made this a cr i t i cal issue for many
of our technology companies . I 'd l ike to read to the Commission one
excerpt I found just yesterday f rom a report f rom the Chinese Patent Office ,
the State In te l lec tual Property Office, which unders cores these issues with
regard to Qualcomm, which is reportedly under an ant i t rust invest igat ion.
I quote : "Although in recent years Chinese enterpr ises have seen
substant ial growth in patents in the f ield of communicat ions with the
advantages that come f rom quant i t y, bu t in key areas such as mobi le phone
chips , Qualcomm s t i l l has the core in te l lectual property, and i t i s providing
Chinese telecom equipment and consumer electronics companies technology
l icenses and patents , and by doing so charging exorb i tant l i cens ing fees in
China."
This paragraph discusses the f rust ra t ion over the patent rents China has
to pay to manufacture what is over 70 percent of the wor ld 's smartphones
and the problem i t faces of having quant i ta t ive but not qual i tat ive
achievements in patents , including a concern about China 's “patent
s t rength,” which i s a key concern to the Sta te Intel lectual Property Office.
I f ind the characterizat ion of l i censing fees by a patent of f ice as
“exorbi tant” in advance of any ant i t rus t determinat i on by the relevant
ant i t rus t authori t ies to be an odd role for a patent of f ice. This t ype of
language could lead foreign companies and count r ies to be concerned about
how fa ir ly the Chinese government may be t reat ing them in ant i t rus t or IP
mat ters .
The manner in which the balance is t i l t ed against the foreign l icensors
has led many, including one Chinese academic , to rea l ize that in i t s current
IP t ransfer regime, quote , " l i censors ' in terests appear to be insuff icient ly
taken into account . "
This is overwhelmingly a l i censee -orien ted IP ant i t rus t envi ronment .
We hope changes can be made in this regime soon.
At the USPTO, we are concerned about pol icies that make i t di f f icul t
to l i cense into China as wel l as onerous legal provis ions that are imposed
on the foreign l icensor .
An example of this is the regulatory provis ion that requi res the foreign
l icensor to indemnify a Chinese l i censee agains t thi rd -part ies who sue for
inf r ingement , in ef fect , tu rn ing a foreign l icensor into an insurance
20
company.
I would c lose now by responding to the Commission 's quest ions about
how we cooperate with other agencies . The PTO is perhaps the agency with
the longes t his tory in deal ing wi th internat ional IP i ssues and technology
t ransfer , dat ing back to 1846 when we helped Samuel F.B. Morse l i cense
his te legraphy technology in Aust ro -Hungary.
Our China Team, which I lead, cons is t s of 21 lawyers and suppor t
personnel , many bi l ingual and b i -cul tural , in Washington , D.C. and three
ci t i es in China. I al so served as the f i rs t USPTO IP at taché when I was
posted to the embassy in China a t the invi tat ion of then Ambassador Randt ,
and, as noted , I have over 30 years ' experience in Chinese law and IP.
While the PTO i tsel f and my team helps develop IP pol icy, i t obvious ly
has no Anti -Monopoly Law enforcement author i ty. For this reason, we take
an act ive ro le in exchanging views and coordinat ing with our s is ter
agencies , l ike the FTC, and express ing our concerns through the
coopera t ive relat ionships we have estab l ished in China.
The PTO is current ly planning a jo int program on IP l icensing with
China 's Patent Office where we hope to ai r many of the concerns I just
ment ioned.
We also have developed a China Resource Center to suppor t a more
data-driven approach to understanding C hina 's IP envi ronment . We're a lso
an act ive part ic ipant in the JCCT and co -chai r the IPR Working Group
under that body. This past December , the JCCT included an important
bi lateral outcome, which we just heard about , on Anti -Monopoly Law, but i t
also included outcomes in re la ted areas such as s tandards, l icensing,
intel lectual property, l egi t imate sales of IP -intensive goods and services ,
abusive IP l i t igat ion, and judic ia l coopera t ion, al l o f which can have
s ignif icant impact on China 's AML envi ronment .
Members of the Commission , we s t rongly support China 's effor t to
develop an ant i t rust regime consis tent with the pract ices of other market
economy count r ies . We al so s t rongly suppor t effor ts to improve the
protect ion of private property r ights , including IP r ights , in China .
However , we are concerned that China 's economy, including in i ts IP
regime, may not be ful ly market driven, which we bel ieve needs to be
acknowledged and d iscussed with our Chinese col leagues.
Thank you, and I welcome your quest ions .
21
PREPARED STATEMENT OF MARK A. COHEN
SPECIAL COUNSEL, U.S. PATENT AND TRADEMARK OFFICE
Statement of
Mark A. Cohen
Special Counsel
United States Patent and Trademark Office
Before the
The U.S.-China Economic and Security Review Commission
Hearing on the Foreign Investment Climate in China:
Present Challenges and Potential for Reform
January 28, 2015
I would like to thank the Congressional Security Commission for inviting the U.S. Patent &
Trademark Office (PTO) to testify today on “The Foreign Investment Climate in China: Present
Challenges and Potential for Reform", particularly in this “Administration Panel: Assessing the
Interface Between China’s Competition and Technology Licensing Policies.” My comments
will focus on questions four and five raised of this group:
“How do China’s intellectual property (IP) policies impact its AML enforcement? And
How does the U.S. government handle the interface between IP and AML policy and
enforcement? How do U.S. agencies monitor the economic impact of China’s IP policies,
including the impact of these policies on AML enforcement?”
I will discuss, in particular, the relationship between the anti-monopoly law and the IP system in
China generally; application of the anti-monopoly law to address IP abuse; problems in obtaining
IP rights in China that may contribute to the anti-monopoly environment; difficulties in IP
enforcement and licensing; and the role of the PTO with respect to these issues.
The Anti-Monopoly Law/IP Relationship in China
China’s experience in IP-related issues has deeply, and perhaps uniquely, informed its
perspective on antitrust issues generally. There are jurisdictional, personnel and legislative
overlaps. For example, China’s specialized IP tribunals and courts handle antitrust litigation.
China’s State Administration for Industry and Commerce, which handles non-price-related
abuse-of-dominance cases, also has jurisdiction over trademarks, trade secrets, consumer
protection and trade-dress cases. MofCOM Director General Shang Ming, who currently
handles mergers, was formerly in charge of IP matters when he was the Director General of Law
and Treaties at the Ministry of Commerce where he defended China on an IP-related WTO case
brought by the United States. Many of China’s antitrust related laws also built upon pre-
existing laws, regulations, and rules, which have significant IP components. These laws include
22
the Anti-Unfair Competition Law, which contains measures to protect trade secrets and trade
dress and the Contract Law, which deals with “monopolization of technology.”1 China is not
unique in its building upon its IP experience to address antitrust issues. For example, the only
World Trade Organization (WTO) treaty governing IP – the Agreement on Trade-Related
Aspects of Intellectual Property Rights or TRIPs Agreement – is also the only WTO treaty that
specifically addresses antitrust enforcement, particularly in the case of abusive practices in
licensing of intellectual property.2
Like recently-enacted IP legislations, enactment of China’s Anti-Monopoly Law regime was
considered a milestone in China’s efforts to develop a market economy. Unfortunately, China
also has a rather long legacy of laws designed to “shake up” the economy – among them, the
patent law, bankruptcy law, income tax law, property law, and now the Anti-Monopoly Law.
Yet, each of these laws is also intended to implement China’s constitutional mandate to develop
a “socialist market economy.”3 Many would view this as an oxymoronic concept. I, instead,
view it as a restriction on the impact of these laws in having their intended effect, and a
necessary instruction regarding how and why we engage China on these laws.
To those of us who have long been involved in IP, many of the concerns that we hear today – for
example, involving transparency, representation of counsel at proceedings, and national
treatment of foreigners – have a long history in IP-related issues.4 What is more important
perhaps is that much as IP has informed China’s Anti-Monopoly Law development, it is likely to
remain a significant part of China’s Anti-Monopoly Law enforcement activities in the years
ahead.
IP Abuse and the Anti-Monopoly Law
Article 55 of China’s Anti-Monopoly Law addresses IP abuse. This article provides as follows:
This Law does not govern the conduct of business operators to exercise their
intellectual property rights under laws and relevant administrative regulations on
intellectual property rights; however, business operators' conduct to eliminate or
restrict market competition by abusing (or misusing) their intellectual property
rights are governed by this Law.
This article is puzzling, and has been the subject of considerable debate. For example, does this
law provide a safe harbor? What constitutes “IP abuse”? How does this law affect other laws
that regulate competition?5
Many observers may find China’s current political emphasis on “IP abuse” a bit hard to swallow.
Whatever the definition of “IP abuse” in Article 55 of the Anti-Monopoly Law and related
regulations and rules, another kind of “IP abuse” in China today that both Chinese and foreign
companies face involves the difficulties they face in obtaining, enforcing, and commercializing
one’s IP rights in a society with sometimes unpredictable legal norms and with what often
appears to be undue political influence. In other words, an IP rights holder cannot abuse its IP
rights unless the holder can have IP use. Inability to commercialize license or enforce patents or
1 Article 329 of Contract Law 2 See, e.g., TRIPS Agreement, Articles 8 and 40. 3 Constitution of the PRC, Article 15; See, also, also the relevant Chinese IP laws e.g., Patent Law, Art. 1,
Trademark Law Article 1. 4 Mark A. Cohen, “How an IP Lawyer Sees China’s Progress in Competition Law”, in International Antitrust Law &
Policy (2011 Competition Law Institute (pp. 537-555) (Fordham Competition Law Institute, 2012) 5 Harris, Wang, Zhang, Cohen and Evrard, Antimonopoly Law and Practice in China, at 216 (Oxford University
Press, 2011).
23
other IP rights is IP abuse in a more fundamental sense. What kind of abuse is $10,000 worth of
infringement damages? We have been encouraging China for 35 years to establish an IP system
that is fully compatible with international norms and that protects IP as a private right. That task
is unfinished, and the challenges that companies face in protecting their IP rights should
necessarily inform China’s antimonopoly policy makers.
Let me give you two snapshots of what this type of “IP abuse” means in current terms, and how
it might relate to China’s Anti-Monopoly Law efforts: (1) the low patent infringement damages
and (2) the low royalty payments that the U.S. receives from China.
As shown in Chart 1 in the Appendix, in 2012, the last year for which relatively complete data is
available, the average damage award in a patent-infringement law suit in China totaled about
RMB ¥52,000 – roughly USD $10,000. Initial data for 2013 suggests that patent-infringement
damages will average around RMB ¥99,000 RMB – about USD $20,000. The most cases were
reported in 2011, with damages at ¥62,160. These are considerably less than average damages in
either Europe or the United States. Most importantly, they are likely not enough to compensate
an inventor for infringement of a valuable invention in the Chinese market.
This information is drawn from a private database of about 31,000 cases (www.ciela.cn);
unfortunately, the Chinese Government does not release any similar data publicly. Higher
damages in 2008 and 2009 were likely due in part to certain high-profile cases, and may be
considered outliers. Many of the high profile judgments at this time were also against foreigners.
The second issue I would like to talk about is the difficulty in achieving legitimate sales of IP
rights in China. Chart 2 in the Appendix shows total payments from China to the United States
for royalties of various kinds.6 In 2012, this totaled approximately USD $5 billion.
Chart 3 in the Appendix shows total royalty payments from Japan to the United States for the
same period: about USD $10 billion.
As these charts suggest, the U.S. receives only 50% of the revenue from China compared to that
received from Japan. However, this is likely to change. The recently released Action Plan for
Further Implementation of the National IP Strategy indicates that China has a goal of increasing
its revenues from royalties and franchise fees for proprietary rights from 1.36 billion USD in
2013 to 8 billion USD in 2020.
Another data point to consider: According to the latest World Bank data, China exports four
times more high-tech goods than Japan. 7 Indeed, our understanding is that China today
produces over 70% of the cell phones used worldwide.8 If one assumes that high-tech goods are
a useful surrogate to measure a country’s “consumption” of IP rights, it is easy to see that China
is a severely under-licensed country. Indeed, China’s dominance as a purchaser of technology
has led at least one Chinese antimonopoly law academic to note that in China’s current IP
transfer legislative regime “licensor’s interests appear to be insufficiently taken into account.”9
6 The licensing royalty data in the charts is bases on US International Trade data released by Bureau of Economic
Analysis (BEA). Specifically, the licensing royalty data is based on the International Trade of Services in the
category of “Charges for the use of intellectual property”
(http://www.bea.gov/iTable/iTable.cfm?reqid=62&step=1#reqid=62&step=7&isuri=1&6210=4&6200=161&6211=
168). Older licensing royalty data (for the years of 2004 to 2008) is also referred to in the USITC’s 2010 report on
"China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the
Effects on the U.S. Economy" (http://www.usitc.gov/publications/332/pub4199.pdf). The USITC’s 2010 report, on
page 2-11, also noted the low licensing royalty payments that the United States receives from China. 7 World Bank data on high-technology exports, http://data.worldbank.org/indicator/TX.VAL.TECH.CD 8 http://www.theatlantic.com/china/archive/2013/08/chinas-dominance-in-manufacturing-in-one-chart/278366/. 9 Wang Xiaoye, Evolution of China’s Antimonopoly Law, at 227 (Edward Elgar Publishing, 2014).
24
At the PTO, we often hear anecdotally and from surveys that US companies are reluctant to
license in China due to its weak IP environment or restrictive licensing conditions. There is
some empirical data that also supports this. For example, the US China Business Council
recently ranked IP enforcement as its number two business concern facing US business in
China.10 Moreover, survey data shows that foreign companies are reluctant to use Chinese law as
a governing law for technology contracts, preferring instead to choose foreign law where
possible, perhaps out of a similar concern over enforcement challenges and onerous statutory
provisions.11
For many years, industry and government officials have also expressed concerns about the
Chinese government being actively engaged in forced technology acquisition, trade secret theft,
and/or “indigenous innovation” policies that are intended to support China’s industrial policies.
These issues have further compounded U.S. concerns over IP infringement and difficulties in
selling IP-intensive goods and services. Today many companies are concerned that they may be
unable to manufacture or sell their products on competitive terms due to preferential policies of
the Chinese government and/or state owned or supported enterprises that favor domestically
innovated products. These concerns over industrial policies may also cause one to question
whether foreign enterprises will be treated fairly in China based on market principles in Anti-
Monopoly Law matters. Reflecting these concerns, USG has repeatedly asked Chinese
authorities, in a variety of fora, to affirm that their antitrust efforts are intended to encourage
competition and not protect individual competitors or industries.12
Obtaining IP Rights in China
China’s patent office, the State Intellectual Property Office (SIPO), is the largest patent office in
the world. In 2013, it received 2,377,061 patent applications. SIPO’s application docket is also
about four times the number of applications received by the Patent and Trademark Office. Most
of the patents filed in China are of Chinese origin. Historically, China has had a more
domestically oriented patent office in terms of origin of applications than the United States. In
some areas, such as utility-model and design patents, well over 95% of its patent applications
originate from Chinese applicants.
The PTO enjoys a good, cooperative relationship with SIPO. Both agencies share many
common challenges such as handling increasingly complex patent applications; attracting and
retaining talented examiners; and maintaining high patent quality. China has emerged as a
critical stakeholder in the global IP system.13 Many foreign companies find that SIPO handles its
patent applications expeditiously and fairly. Of course, there are areas where we would like to
see improvement. However, in general, except for patent practices in certain areas, such as those
in the pharmaceutical sector, China does not show any unusual tendencies in this key IP
10 See http://uschina.org/reports/uscbc-2014-china-business-environment-survey-results 11 See http://chinaipr.com/2014/06/19/choice-of-law-in-ip-contracts-with-china-a-sleeper-issue/ 12 See, e.g., Joint Fact Sheet on 25th Joint Commission on Commerce and Trade, competition outcome
(http://www.commerce.gov/news/fact-sheets/2014/12/29/us-china-joint-fact-sheet-25th-joint-commission-
commerce-and-trade), and press release of the Sixth Strategic and Economic Dialogue “In response to concerns of
U.S. companies and government officials regarding enforcement of China's Anti-Monopoly Law, China recognized
that the objective of competition policy is to promote consumer welfare and economic efficiency, rather than to
promote individual competitors or industries, and that enforcement of its competition law should be fair, objective,
transparent, and non-discriminatory.” (http://www.treasury.gov/press-center/press-releases/Pages/jl2563.aspx). 13 See China as an IP Stakeholder, David Kappos, Under Secretary of Commerce for Intellectual Property and
Director of the USPTO, 2012 (http://www.uspto.gov/blog/director/entry/china_as_an_ip_stakeholder
25
“building block”, particularly in the high-technology sectors.
There is one area, however, where policies that support China’s patent system may have
contributed to a kind of self-induced frustration on IP and technology-related issues. Unlike
other more economically developed countries, China’s IP is perceived to have low commercial
value. The Chinese national and local governments have adopted numerous policies to
encourage domestic companies to obtain patents in China. These policies include the following:
subsidies for patent-application filings; rewards or awards for patent grants; the granting of
tenure (to a university professor) based on the number of patent filings; obtaining a valuable
municipal residence permit (a hukou in Mandarin Chinese) based on patent filings; commutation
of prison sentences for prisoners who file patents14; and promotion of government officials based
on achieving numerical patent quotas. The result has been an explosion in patent applications
and grants. Many of these patents, such as utility-model and design patents, are likely of low
quality because they are not substantively examined. Some of these patents may even involve
trade secrets misappropriated from a former employer, or copying of competitors’ designs or
technology. These patents may not reflect market-driven innovation, but are responsive to
government incentives. The data shows that China is aggressively patenting, but it may not
always be innovating. This lack of demonstrable qualitative achievement in its IP system must
be frustrating for Chinese leaders, who have failed to see commercial results from their IP
policies, and may lead them to pursue policies in order to achieve greater commercial uptake of
China’s patents and IP rights.
These kinds of policies can also lead to litigation problems for U.S. companies. While many of
these patents are of low quality, they do have litigation value to Chinese patent “cockroaches”
(similar to patent “trolls” in the United States) which have been filing abusive litigation lawsuits,
often against U.S. companies, based on low-quality and subsidized patents, without concern for
compensating victims for anti-competitive activity. Chinese regulators should address this issue
by establishing mechanisms to disincentivize abusive patent litigation, if China desires fair IP
and antitrust regimes.
IP Enforcement
The enforcement of IP rights is the second critical building block that has long been of concern
in China. Damages in patent cases are too low to compensate most innovations. In fact, a
remarkable disparity appears to be emerging between the damages awarded in antitrust
investigations and the damages awarded in IP matters, which casts further doubt on how much
China values IP rights (or how much it may overvalue antitrust). As noted, average damages
from patent litigation in China range from USD $10,000 to $20,000 per year. But IP-related
issues have been significant enough to cause major proposed mergers to fall apart (beverage
makers Huiyuan and Coca-Cola), or have resulted in multimillion-dollar antitrust liability (e.g.,
Huawei/InterDigital, amongst others), and there is speculation that fines against Qualcomm
could exceed one billion dollars, 15 or more than 20% of total US technology exports in 2013,
and as much as fifty thousand to a hundred thousand times average damages for patent
14 See http://www.scmp.com/news/china/article/1681850/how-get-out-jail-early-china-buy-inventors-idea-and-
patent-it 15 See, e.g., China Reportedly Wrapping Up Qualcomm Investigation; Hefty Fines ExpectedSan Diego Business
Journal: http://www.sdbj.com/news/2014/dec/29/china-reportedly-wrapping-qualcomm-investigation-h/ (Dec. 29,
2014)
26
infringement. This kind of disparity might easily encourage a prospective licensee in China in
appropriate circumstances (such as involving a standards essential patent, discussed below) to
consider the potential benefits of continuing to infringe and risk an adverse Chinese judicial
decision while at the same time pro-actively launch a Chinese anti-monopoly law case for even
greater damages than royalties that are being asked of by the prospective licensor.
As with China’s Anti-Monopoly Law regime, administrative agencies have conducted most of
China’s IP enforcement, and they historically have not been transparent. However, significant
improvements have been made in recent years.16 We hope that these experiences, including
more comprehensive reporting on cases, compilation of case data, and publishing of model or
guiding cases, can take place in the Anti-Monopoly Law context so that these cases can guide
litigants. Our experience has also been that the IP tribunals and newly established specialized IP
courts, which also have jurisdiction over AML cases, have demonstrated increasing
professionalism and expertise in IP-related matters. However, the IP experience has also shown
that both the courts and administrative agencies are not yet independent. Interference from
Communist Party organs, local government, and the court’s own “adjudication committees” have
been concerns in IP matters. We hope that reforms recently announced in the Fourth Plenum and
by Supreme People’s Court President Zhou Qiang will help address some of these concerns.
Another key concern in enforcing IP rights in China is the problem of infringers’ delays in taking
licenses. This is particularly acute during the standards setting process. To explain this concern,
let me first very briefly describe what standards are, why they are important, and the voluntary
process used to develop standards that we use every day. Standards, and particularly voluntary
consensus standards set by standards-developing organizations (SDOs), have come to play an
increasingly important role in our economy. In much of the world, the development of a
technological standard occurs according to a voluntary, consensus based process, in which
participants select a set of technological solutions to a given problem, often including
technologies protected by patents, which can be deemed “standards essential patents” when they
are necessary to implement the standard. Standard setting participants typically agree in advance
to general guidelines governing any obligations of participants to license any essential patents to
parties wishing to implement the standard on F/RAND ( or fair/reasonable, and non-
discriminatory) terms. The main concern many U.S. companies face in China arises when
Chinese companies delay in taking a license on FRAND terms, but the licensor has limited
enforcement options because it is practically unable to obtain appropriate damages from IP
courts in China. In addition there isthe possibility that Chinese companies, usually implementers
of the standard, delay in taking a license on FRAND terms and claim that the licensor is abusing
its rights in violation of the FRAND commitment in high stakes Chinese anti-monopoly law
litigation. . In other words, we are concerned that licensee Chinese companies view licensor
foreign companies’ willingness to license as unilateral – only restricting the terms of the license
while not requiring the licensee to enter into timely good faith negotiation. Companies may seek
to minimize these risks by bringing litigation outside of China. An example of this is a recent
case in India involving a Chinese company, where the licensor took action outside of China,
possibly to minimize these risks and that this problem described above.17
16 See, e.g., Through A Glass Less Darkly – China’s March to Administrative Enforcement Transparency, at
http://chinaipr.com/2013/11/24/through-a-glass-less-darkly-chinas-march-to-administrative-enforcement-
transparency/. / 17 Xiaomi Face Phone Ban In India Over Erickson Patent Suit,
http://www.networkworld.com/article/2858554/xiaomi-faces-phone-ban-in-india-over-ericsson-patent-suit.html
27
This delay is further exacerbated by China’s patent law which has a two-year statute of
limitations to initiate a patent infringement action. In the United States, we have a six-year
period to initiate a patent infringement action. Taiwan, Brazil, Japan, South Korea, and
Germany all have longer periods. Unless another exemption applies, a U.S. company seeking to
license its technology to China must initiate potentially costly litigation within that two-year
period.
We believe that prospective Chinese licensees should negotiate FRAND licensing agreements in
good faith. We have engaged our Chinese colleagues on this important issue, and will continue
to do so.
Licensing of IP Rights
This brings me to the “licensing” of IP rights, the third building block of China’s Anti-Monopoly
Law and IP regime. Like the Department of Justice and Federal Trade Commission, China’s
antitrust regulators have statutory authority to investigate possible anticompetitive conduct,
including that involving IP licensing transactions. However, the ability to license technology is
an important trade-related concern, and which is of interest to the Department of Commerce, the
Office of the U.S. Trade Representative, as well as the numerous U.S. government agencies that
have cooperative research and development projects in China.
At the PTO, we encourage our other agency colleagues to support U.S. efforts to monetize
technology in China’s markets. We are concerned about restrictions on U.S. companies’ ability
to license their technology. Several of these restrictions already have been mentioned, for
example: weak damages for infringement; short statutes of limitations; and excessive
government interference in the market. One particular regulation is especially troubling --
China’s Technology Import and Export Regulations, which the Ministry of Commerce enforces,
requires that a company licensing a foreign technology indemnify a Chinese licensee against
third parties who sue for infringement. The specific language is as follows:
If the use of the technology provided by the licensor by the licensee of a technology
import contract in accordance with the contract infringes upon the lawful rights and
interests of another person, the responsibility shall be borne by the licensor.18
This provision is mandatory. Its violation, arguably, might entail a claim for “monopolization of
technology” under Article 329 of the Contract Law. By comparison, licensors of Chinese
technology are not subject to any explicit indemnification requirement.19
Consider this provision in the context of the current cell-phone patent “wars” that are occurring
throughout the world. It would be foolish for a technology licensor to offer any kind of
indemnity in these circumstances. However, Chinese law requires it for technology import.
This provision effectively turns a license agreement into an insurance contract. As another
example, consider the explosion of low-quality, unexamined utility-model patents in China.
Today, very few companies can afford to undertake comprehensive freedom-to-operate analyses
of all patents applied for or granted in China, due to sheer magnitude and thus may be reluctant
to license their technology if they need to offer this type of indemnity.
China has other onerous provisions in its licensing regime. For example, it also requires that the
licensee own improvements to any technology that is licensed, as part of these same technology-
18 Article 24(3) of China’s Technology Import and Export Regulations. 19 Agreements regarding the export of Chinese technology are covered by Article 353 of China’s Contract Law,
which allows parties to negotiate liability for third-party infringement claims.
28
transfer regulations. There is no similar requirement under U.S. law. In essence, a foreign
technology licensor is creating a competitor through this mandatory provision, in the form of a
legalized forced technology transfer.
Another critical area involves the relationship between the state’s involvement in licensing and
IP. U.S. firms, for example, complain that they may be prohibited from participating in core
aspects of standards-setting bodies in China. They also complain that certain Chinese State-
owned or approved actors have severely decreased the value of their IP, through state-run
monopolies that control the import or sale of copyright content, such as motion picture imports
or music ring tones. 20
I would close now by responding to the Committee’s questions about how we cooperate with
other agencies.
The Role of the U.S. Patent and Trademark Office on Anti-Monopoly Matters in China
The Patent and Trademark Office (PTO) is very interested in intellectual property issues that
involve antitrust, particularly those involving standards, intellectual property abuse and misuse,
and licensing. From the authority granted under the American Inventors Protection Act21, the
Director of the Office advises the President of the United States, through the Secretary of
Commerce, on all matters involving intellectual property.
We are perhaps the agency with the longest history dealing with these IP issues. Our
involvement with licensing and standards in an international context goes back to 1846 when a
U.S. Patent Office representative helped Samuel F. B. Morse license his U.S. patents to the
Austro-Hungarian Empire, thereby helping to establish the world standard for telegraphy in
Europe.22
Our “China Team” which I lead, consists of 21 lawyers and support personnel, located in
Washington, D.C., and three cities in China: Beijing, Guangzhou, and Shanghai. We have
negotiated agreements and Memoranda of Understanding to support cooperative activities with
several Chinese agencies with authority over Anti-Monopoly Law-related issues, including the
20 See ttp://beijing.usembassy-china.org.cn/iprindustry.html (“The piracy problem is compounded by market access
barriers including: A government monopoly on film importation [;] A theatrical distribution duopoly.”); with regard
to the ringtone duopoly in music, see http://www.billboard.com/articles/6398489/chinas-mobile-providers-huge-
problem-music-industry-ringtones (“According to a 2011 report published in the industry journal Science-
Technology & Publication,…state-owned telecom operators -- including China Mobile, China Telecom and China
Unicom -- siphon around 90-94 percent of the profit they make from value-added music subscriptions. …This
disparity in revenue distribution was also highlighted in a China Daily feature which reflects these figures: “If a
song generates 100 yuan [$15.70] in revenue, only 2 yuan [$0.32] goes to music producers in the form of royalties…
The rest goes to telecom operators such as China Mobile as well as Internet service providers… Here's the
clincher: ..90% of total recorded music industry revenue is derived from these mobile music services.”) Regarding
discriminatory practices in standards setting, the report of Dan Breznitz and Michael Murphree to the Commission
in January 2013 (The Rise of China in Technology Standards: New Norms in Old Institutions)
(http://www.uscc.gov/Research/rise-china-technology-standards-new-norms-old-institutions): ( “Technical
committees under China’s standards bodies such as CESI and CCSA have multiple categories of membership. At the
most basic level, there are observing members and voting members. ..Foreign firms are not barred from voting
membership. However, while able to vote and contribute technology, foreign enterprises still have no direct voice in
the final direction and adoption of the standard or selection of individual technologies to incorporate into specific
protocols.”)
21 Public Law 106-113 and amended by the Intellectual Property and High Technology Technical Amendments Act
of 2002 (Public Law 107-273) enacted November 2, 2002. 22 Silverman, Lightning Man – The Accursed Life of Samuel F. B. Morse, at 273 (2003).
29
State Administration for Industry and Commerce, the Ministry of Commerce, and the State
Intellectual Property Office.
While the PTO helps to develop IP policy, it has no enforcement authority. For this reason, we
take an active role in exchanging views and coordinating with our sister agencies. We engage in
many activities to encourage this kind of cross-coordination. For example, each year, we host a
comprehensive, one-day training program on IP developments in China – kind of an IP boot
camp – that is intended primarily for our diplomats going on to their posts abroad. We
frequently invite industry and Hill staffers to this event. We also work with all U.S. IP agencies
in organizing and supporting a range of training programs. A few years ago, we hosted the
Minister from the State Administration for Industry and Commerce, inviting our antitrust
colleagues to participate, as well as U.S.-based trade associations, such as the Licensing
Executive Society, the Intellectual Property Owners Association, and the American Intellectual
Property Law Association. This year, with funding from the U.S. Trade and Development
Agency and support from USTR and others, we expect to host a program on China’s innovation,
which will feature a strong Anti-Monopoly Law component. The PTO is also currently planning
a joint program on IP licensing with China’s SIPO, where we hope to air some of these concerns.
We expect to invite colleagues from the antitrust agencies to participate. Through these and
other avenues, we hope that we can make a difference for our companies and for China
Through our China Resource Center, which we have just inaugurated, we collect data on all IP-
related matters. The focus of this center is on IP rights, their protection, enforcement, and
commercialization; it collaborates closely with the PTO’s Chief Economist to support more
empirically-driven analysis of China’s intellectual property environment. As this effort grows,
we hope that it can be a resource to the U.S. Government and business community, including our
antitrust colleagues.
In Anti-Monopoly Law matters, we monitor the press and other media for signs of policy
positions or shifts, and then work with our inter-agency colleagues to present a unified U.S.
Government position and approach. We proactively reach out to U.S. companies that are
encountering antitrust issues involving IP. A primary concern is to enable our companies to
fairly monetize their IP rights with minimum regulatory burdens. When significant antitrust
cases arise, we collaborate closely with the Departments of Commerce and Justice, the Office of
the U.S. Trade Representative, the Federal Trade Commission, and others to determine the best
strategy to pursue.
We also are an active participant in the Joint Commission on Commerce and Trade, and co-chair
the IPR Working Group under that body. This past December, the JCCT included several
bilateral outcomes on Anti-Monopoly Law, standards, licensing, intellectual property, legitimate
sales of IP-intensive goods and services, abusive IP litigation, and judicial cooperation – all of
which directly impact China’s Anti-Monopoly Law environment. I refer the Commission to the
U.S. Fact Sheet and U.S.-China-Joint Fact Sheet from the JCCT for further information on the
many important developments in these areas.23
I hope that my observations will aid the Commission in understanding how the PTO views some
of the building-block issues in China’s antitrust environment. While the antitrust issues are
complex, we also believe that we should not lose sight of the significant IP-related “building-
block” challenges that remain. We strongly support China’s efforts to develop an antitrust
regime consistent with the practices of other market-economy countries. However, we are
23 http://www.commerce.gov/news/fact-sheets/2014/12/29/us-china-joint-fact-sheet-25th-joint-commission-
commerce-and-trade
30
concerned that there are many aspects of China’s economy, including in its IP regime, that are
different from ours and may not be fully market driven, which need to be acknowledged and
discussed.
Thank you for your time and attention.
31
Appendix: Charts
Chart 1:
Average Patent Infringement Damages Awards in China
Chart 2:
Total Receipts from and Payments to China for Royalties of Various Kinds
0
1,000
2,000
3,000
4,000
5,000
6,000
2006 2007 2008 2009 2010 2011 2012
total receipts fromChina ($million)
total paymentsto China ($million)
32
Chart 3:
Total Receipts from and Payments to Japan for Royalties of Various Kinds
0
2,000
4,000
6,000
8,000
10,000
12,000
2006 2007 2008 2009 2010 2011 2012
total receipts fromJapan ($million)
total payments toJapan ($million)
33
ADMINISTRATION PANEL QUESTION AND ANSWER
CHAIRMAN REINSCH: Thank you very much.
Fi rs t , we 'l l go to Commissioner Shea.
VICE CHAIRMAN SHEA: Thank you very much for your tes t imony
and thank you for your service wi th the U.S. government .
Commissioner Ohlhausen, in your wri t ten s tatement and in your ora l
s ta tement --and you also m ent ioned thi s , Mr. Cohen, in your s tatement - - you
cal led the commitments that the Chinese made at the recent JCCT --the
increased abi l i t y of counsel to at tend meet ings , more t ransparent penal ty
procedures , compet i t ion -based remedies --as "notable advances," and, Mr.
Cohen, you cal led them "outcomes."
These commitments were made in December . Have you seen any
fol low-up on those commitments that would potent ia l l y make them, in my
view, real outcomes s ince that t ime?
MS. OHLHAUSEN: I think that ' s always the quest ion. How wil l the
commitments be implemented; how wil l they be honored? I t 's a fai r l y short
amount of t ime between December t i l l now so I can ' t point to anything in
part icular that showed s teps being taken to honor those commitments .
Certainly the fact that they made those commitments , which reflected the
highest pr iori t y cr i t ici sms that the ant i t rus t agencies and others in the U.S.
government were ra is ing, I think is a good s tep , but I think we s t i l l need to
see what changes wi l l ac tual ly be undert aken in China.
VICE CHAIRMAN SHEA: Could I ask you to keep the Commission
informed about those commitments and whether they were actual ly
operat ional ized? And when would you fee l tha t maybe they' re not l iving up
to their commitment? I mean when does so meone in your posi t ion --okay, i t
happened in December, and noth ing has real ly happened. It ' s January, l ate
January, okay, i t ' s been s ix weeks or so, and when do you s tar t quest ioning
whether maybe thi s commitment was jus t a commitment and not something
that was serious ly considered to be undertaken?
MS. OHLHAUSEN: One of the things that would be useful to me is as
companies who are undergoing the invest igat ions and the merger reviews
and NDRC reviews in China, i f they report back whether there have been
improvements , whether they are get t ing more informat ion f rom the Chinese
authori t ies , whether they' re having an easier t ime having the counsel of
the ir choosing a t these meet ings. So that ' s something I ' l l cont inue to
monitor this year .
VICE CHAIRMAN SHEA: And could you keep us pos ted? I would
rea l ly appreciate that .
MS. OHLHAUSEN: Sure .
VICE CHAIRMAN SHEA: I 'm going to jus t edi torial ize a l i t t l e b i t
now. I mean I th ink the GAO put out a report where the U.S. government
doesn ' t even know what commitments were made in past JCCTs and SEDs or
is confused , and some commitments were recommit ted at a subsequent JCCT
and l i s ted as a posi t ive outcome, and, you know, the Chinese government
34
has made commitments on government procurement , t r ade secre ts , software
and onl ine p iracy, indigenous innovat ion, t echnology t ransfer in previous
JCCTs and o ther b i latera l fora, and they haven ' t real ly - - those commitments
haven ' t real ly come to frui t ion .
So I 'm just ed i torial iz ing. I think the U.S. gover nment f rom where I
s i t places a l i t t l e bi t too much emphasis on commitments rather than actual
outcomes.
MR. COHEN: Yeah. Let me just add to that , I think a lot of these
JCCT commitments , some of them are of a cooperat ive nature, some of them
are ac tual ly concrete commitments , al though they' re rare ly expressed in
terms of legal l anguage. They're expressed in d iplomatic language.
That doesn 't mean they don ' t have an important ef fect or they can ' t be
catalyt ic in nature or they can ' t actual ly represent t he conclusion of a
cer ta in Chinese thought process on an i ssue, but they real ly work best in a
systemic sense . If you have indus try -chal lenging AML pract ices , i f you
have U.S. government advocat ing for certain fa i r pract ices , i f you have
domest ic const i tu ents in China who are also recogniz ing, as some recent ly
have, that some of the AML pract ices may be depar t ing f rom where China
needs to go , i f you have concerns with in China about t ransparency of
adminis t ra t ive agencies , which is another ongoing concern w ith China,
wi th in China , then a l l these issues could coalesce to drive real change, and
the JCCT is one important part of that process , in my personal view.
VICE CHAIRMAN SHEA: Okay. I know my t ime is up . I have a
quest ion for Mr. Cohen, but I ' l l defer t i l l maybe a second round.
CHAIRMAN REINSCH: Okay. Commissioner Wessel .
COMMISSIONER WESSEL: Thank you, to both of you, and, Mr.
Cohen, because we share a mutual f r iend, great to meet you f inal ly, and I
hope that our f r iend on the West Coast i s ac tua l ly watching this i f i t ' s being
Web cas t . That would be a good penal ty for - - i t ' s s ix o 'c lock -- that ' s why I
hope he 's up watching.
And appreciate al l that the two of you do. As Commiss ioner Shea
indicated , publ ic service is a noble cal l ing, and we appreci ate what you do
everyday.
For many years , as you know, success in the U.S. -China relat ionship
was easi ly measured by the t rade defici t , and next week, we expect to have
the f inal numbers for 2014 come out , and another h is tor ic level of t rade
defici t between our two count r ies , but increasingly f rom U.S. businesses ,
there 's a di fferent measure of success in terms of the profi tabi l i t y, the
access to the Chinese market , the returns on the investments they've made,
both short and long term, and l ike Commissio ner Shea 's quest ions about the
JCCT and S&ED and the dialogue that we 've engaged in for many years ,
what I hear from many U.S . companies i s that success i s actual ly being
penal ized.
You ra ised the Qualcomm case, and here we have a great U.S. company
that i s succeeding, and the Chinese are basica l ly saying you 're succeeding a
l i t t l e too much. We have China developing some of i ts own standards in
35
dif ferent kinds of t echnologies , and then you have FRAND and o ther
mechanisms or metr ics , I guess , being appl ied to them.
It ' s the job of the U.S. government to engage in dialogue, but the
American publ ic is get t ing f rus trated , and I think increasingly the bus iness
community is get t ing frust rated .
How much longer should we wai t for China to have a global sys tem?
Wil l they ever get there? Commissioner , you ment ioned that they have
s ta ted t ime and t ime again that there wil l be Chinese characteris t ics to their
system. And i f we don ' t bel ieve they are going to have a compat ible
system--let ' s cal l i t tha t - -what should the U.S . response be?
Are there things that the U.S. Congress , as wel l as the adminis t rat ion,
should look a t to t ry and demand or assure proper recompense, proper legal
r ights , i f you wil l , in terms of how we v iew the sys tem? Is there some
bi lateral mechanism? The quest ion, Mr. Cohen, you raised about the
royal ty rents , et cetera , et cetera. Help us . How long should we be pat ien t?
Pat ience is sort of running th in for a lot of us . And what mechanisms can
we look at now basical ly i f there is an inte rim as to assert U.S . r ights?
MS. OHLHAUSEN: Speaking as an ant i t rust of f icial , one of the things
that we have t r ied to do i s to cont inue to engage in a very serious dialogue
with the Chinese on these issues . So we have a memorandum of
understanding wit h the three AML agencies . We've had that s ince 2011,
and we have high -level dialogues based on that memorandum, and we have
one coming up this year , and I hope or presume that those i ssues wi l l
cont inue to be ra ised.
The other thing i s cont inued engageme nt . For example, when I was in
China las t year , I was asked to s tay and help t ra in some of thei r judges who
are thei r IP court judges, who actual ly also hear thei r an t i t rus t appeals on
these i ssues . But one of the things we are hearing there, and i t does
cont inue to be a problem, is thi s focus on IP, intel lectual proper ty, looking
at i t as just s tat ic ef f iciencies .
They assert that the way you get more compet i t ion is to get more
compet i tors in the marketplace , and you do that by compulsory l i censing or
applying an essent ia l faci l i t i es doct r ine to IP r ights . So we cont inue to
press them on those issues to t ry to explain that this is not good
internat ional ly, but i t 's a lso real ly ul t imately not good for the Chinese
economy, and I do think that put t ing thin gs in a way that expla ins why i t ' s
bet ter for them in the long term wi l l have more of an impact .
There are people behind the scenes in the Chinese agencies who I know
are t rying to advocate thi s internal ly, and our cont inued dialogue wi th them
I bel ieve g ives them the support and the energy that they need to cont inue
to advocate for these pos i t ions .
I think that encouraging the Chinese to cont inue to t ry to reach
internat ional norms, to recognize -- for us to have an evenhanded approach
that recognizes when they've made improvements but a lso cri t i cizes when
we can see obvious discrepancies or f laws, that ' s important , and for me my
tool box is just the ant i t rus t l aws and the internat ional d ia logue wi th that .
36
But I don 't know i f Mark has addi t ional ideas .
MR. COHEN: Yes. It ' s a good quest ion , and I think part of the answer
is perhaps to come back with other quest ions, which is how much do we
rea l ly understand about how the Chinese sys tem works and why i t has the
kinds of problems that we 've seen mani fest i t sel f .
There 's so much about the Chinese sys tem that is counter intui t ive both
in IP and I suspect in ant i t rust . We now have the larges t patent of f ice in
the world . It ' s four t imes the s ize of the USPTO and in tends to grow
another three or four t imes in t he next f ive years . This i s going to be ten
t imes the s ize of the United States PTO with about s ix mi l l ion plus
appl icat ions per year .
We have the most l i t igious society for IP in the world, and 97 percent
of the l i t igants are Chinese wi th a very smal l foreign element . Foreigners
tend to win IP l i t iga t ion in China. So why are we so frust ra ted about
cer ta in aspects? I 'm not saying we don 't deserve to be frustrated , but the
frust rat ion , some of them seem to be related to sys temic problems: lack of
rule of l aw; lack of t rust in the judiciary; over - involvement of indust r ial
pol icy; and s tate, legacy s tate planning agencies in IP and in ant i t rust .
These are sys temic i ssues .
The IP envi ronment in China, the bigges t f law in my personal opinion
goes back to the preamble to the TRIPS agreement where i t says that IP is a
“private r ight .” Here you have IP as an element of indust r ial pol icy, as an
element of s tate planning with targets on a municipal l evel , on a provincia l
level , about how many patents to be f i l ed. You can imagine the problems
that evolve when you s tar t having ant i t rust regulators complaining about
foreign l icensors , and, a t the same t ime, they' re providing subsidies , grants ,
support , awards for local compet i tors .
There 's an innate inherent con fl ic t of in terest that evolves when the
s ta te is so act ively involved in certain aspects of the market . So I think we
have yet to be ful ly candid in many aspects of this problem. We monitor at
the PTO U.S. l i t iga t ion involving Chinese companies in the U. S . , and we
t ry to get a sense about why people l i t igate in the U.S . , why they l i t igate in
China or in o ther count r ies , and the answers are sometimes counterin tui t ive.
I think our sys tem can a lso be improved in terms of when we exert
ex traterr i torial ju r isdic t ion, what we expect of l i t igants coming into thi s
count ry, what kind of cooperat ion we get with the Chinese cour ts i f we
request ev idence f rom the courts , et cetera, and that might be one place to
look at some improvements where we can make a di f fere nce . It doesn ' t
resolve al l the problems, but i t could help, and I think t rying to get to the
poin t where we real ly have the kind of candid exchange with some of our
Chinese col leagues that this is not the way the sys tem was intended, a t l east
in IP, I th ink would help in addressing some of these problems.
COMMISSIONER WESSEL: Thank you.
If there 's another round, please mark me down.
CHAIRMAN REINSCH: Thank you.
Commissioner Tobin.
37
COMMISSIONER TOBIN: Great . Thank you, both , for join ing us .
Unl ike most of my other col leagues , I 'm not t rained as a lawyer ; I 'm a
social sc ient i s t . And I would l ike to benefi t f rom your ex tensive experience
with the cul ture and the legal cu l ture. So I have a quest ion for each of you.
Commissioner , you ment ioned that you have vis i ted with people
ex tensively, f ive t imes s ince a year -and-a-hal f ago. When you talk with the
Chinese regulators , and I 'm sure you convey what some of the issues are in
high technology, what do they say? I want you to , in essence, te l l us what
they are tel l ing you. I 'm t rying to understand thei r perspect ive . It makes
no sense to us , but cul tural ly maybe, or jus t report ing wise, you can inform
us on that . So that wi l l be my ques t ion for you.
And, Mr. Cohen, you ment ioned that i t ' s sever ely “underl icensed” - -
under - l icensed-- this envi ronment . I guess I have a hypothet ical . If i t were
less “underl icensed”,under - l i censed, therefore more l i censed , would i t
begin to sh if t the way they do thei r l egal regulatory work?
So, Commissioners , te l l u s what they are thinking, and are they
report ing to anyone? Are they get t ing mixed messages, bo th the law and
other pressures , and i f so, what are they?
MS. OHLHAUSEN: One of the most reveal ing experiences that I had
was when I at tended the f i f th annive rsary of thei r Ant i -Monopoly Law in
2013, and thi s was a big event tha t the Chinese ant i t rust expert body who
advises the ant i t rust agencies put on, and there were very high level
minis ters , and actual ly some of the proceedings were broadcast on TV.
And they talked a lo t about the value of compet i t ion . Compet i t ion i s so
importan t - -and everyone had that message, which was very interes t ing when
you th ink , coming f rom a cent ral ly -cont rol led economy to now being a
compet i t ion focus . But when you delved in and said, wel l , what does
compet i t ion mean to you, that ' s where the chal lenges and the di ff icul t ies
came up.
Some were very c lear tha t i t means enhancing consumer welfare , that i t
i s economics based, but o thers were very c lear that , wel l , compet i t ion just
means having more compet i tors . So i f we choose an an t i t rust approach or a
l icensing approach that has more compet i tors , tha t 's bet ter and that creates
more compet i t ion, and that ' s when they' re looking at the outcome today
rather than the outcome tomorrow. It ' s where they' re saying we just want to
have more people manufactur ing these products and that ' s more
compet i t ion .
So I think you need a more sophis t icated analys is for them, and some
of the people in China were advocat ing this , but there are a variety of
voices saying no , we want innovat ion, and what we don ' t want i s t en people
creat ing today's t echnology. What we want is incent ives for people to
create tomorrow's technology.
And so that was one of those di f f icul t ies and also quest ions about ,
wel l , i f a Chinese business was going to go bankrupt because of l icensing,
would you intervene? And then , of course , the answer was, wel l maybe
then we would because that could reduce compet i t ion ra ther than saying,
38
well , that ' s jus t the normal course of compet i t ion; there are winners and
losers .
So the other th ing that I found that they a lways reflect back when there
are cr i t i cisms i s they say we 're just doing what you do , and they' re very
at ten t ive to any indicat ion of posi t ions that the U.S. has taken . For
example, I 've cr i t i cized my own agency' s decis ions that look l ike we 're
devaluing IP r ights , that look l ike in the U.S . we 're saying, oh , the r ight to
exclude, that ' s probably being used ant icompet i t ively, and that i t ' s
dis favored , and they' re very quick to p oint tha t out .
So I think that ' s the other thing that we need to be careful about ,
something with in our cont rol , i s to make sure that we are not doing things
that can be port rayed or misconst rued as devaluing the importance of IP
r ights in the U.S.
COMMISSIONER TOBIN: That 's part of what you talked about , be
much clearer on our s ide .
MS. OHLHAUSEN: Yes , absolutely.
COMMISSIONER TOBIN: Thank you.
MR. COHEN: So le t me elaborate a l i t t le bi t what I mean by under -
l icensing and perhaps what the future h olds , but I can 't t el l you what the
amount precisely that China is under - l icensed i s . I d id some rough
est imates based on high -tech product ion and based on Census data on our
royal ty receip ts f rom China.
It seems to me that high -tech tends to be a patent -dense and
technology-dense area so i t 's a good surrogate that i f you manufacture a lo t
of high tech goods or you produce 70 percent or more of the cel lphones in
the world , then you probably should be buying the technology to produce
that . China i s in the unique posi t ion of being the world 's l eading high tech
producer of products that for the most part i t d idn ' t cont r ibute much in
terms of innovat ion .
So i t has the best of both worlds . This is a long debate within China .
The glass seems to be hal f empty to many Chinese off icials . Why are we
spending so much in royal t ies? Well , you ' re spending so much in royal t ies
because you have thousands of workers producing products for export and
for domest ic consumption for products you did not invent . That 's how the
IP system is supposed to work. That 's the reason you joined the WTO. So I
tend to view th is as a half - ful l s i tuat ion . You 're darn lucky. We'd love to
have those jobs for products that we helped innovate.
And as you look at i t , even $5 bi l l ion is not a huge amount considering
the magni tude of the bi latera l t rade. I suspect there should be several
mult iples of where i t current ly is , and I 've been t rying to work with in the
Commerce Department and with other agencies about t rying to help our
companies export t echnology and to understand what happens in a much
more granular way when they t ry to do deals with their Chinese
counterparts . So that ' s one thing.
The other s ide of the co in is that China now wants to be a p layer in
this f ie ld. The most recent Five Year Plan for intel lectual property, the
39
National IP S trategy, I bel ieve has China increasing i ts technology exports
from one bi l l ion a year global ly to about e ight bi l l ion . So they want to be a
player , and that ' s a good thing because I think the future is ul t imately not
in an I sel l / you buy. Par t icularly with China, because of i t s r ich potent ial --
human resources and technical t alen t - - there wil l be a lo t more
col laborat ion.
But I al so caut ion my col leagues f requent ly that s imply because China
wants to be a player doesn 't mean the playing f ie ld wi l l be level , and those
are two di f ferent things , and, in fact , the IP experience in China has rather
been counterin tui t ive in this area as wel l . As China has become an IP
s takeholder , i t doesn 't mean that the IP problems have gone away. It ' s
meant they've gone into other areas , l ike an t i t rust , and people talk a l i t t l e
bi t l ess about counterfei t ing or pi racy, which s t i l l ex is t s , and they've gone
much more in to a high tech k ind of f rame.
So I don ' t think that the s i tuat ion wil l ease i tsel f necessari ly as China
develops. It wi l l just change. But I do think there 's a lot of potent ial for
increased sales of U.S. t echnology, which China should pay for , and this is
not jus t t rue of patents . China is severe ly under - l icensed in software i f you
speak to any provider of business software to China.
COMMISSIONER TOBIN: Thank you very much. CHAIRMAN
REINSCH: Thank you.
Commissioner Fiedler .
COMMISSIONER FIEDLER: Thank you.
I wanted to address your "Chinese characteris t ics" and our d iscuss ions
with them about what 's in thei r interest . It seems to me after al l these years
tha t i t ' s unques t ionable that they know thei r interest s and that they' re
actual ly expressing them through the use or misuse of the law, th e Ant i -
Monopoly Law, in this ins tance , or in previous instances in thei r fai lure to
enforce IP. So I don ' t buy a t al l the sort of not ion that they don ' t
understand. I think i t 's a fa i r l y s igni f icant understanding of the sys tem,
and they say we don ' t l ike i t . For us a t this point in our hi s tory, in our
development , i t doesn 't sui t us . It doesn 't work for us .
And lots of d ia logue just post a l lows them to go on and proceed with
the behavior in the face of a sort of inert ia maybe perhaps on our part or
maybe i t ' s pol i t i cal ly di f f icu l t for us to cal l a hal t to some of this s tuf f
because of lot s of o ther pol i t i cal contex t . I mean there is a pol i t ical
context in China within which these decis ions are being made. Right now
i t 's a di f ferent pol i t ical context th an ever before, i t seems to me, with Xi 's
consol idat ion of power being what i t i s .
So my quest ion to you i s when we 're formulat ing our pol icy, is there
an interagency process where you get informat ion from other agencies of
government that bear upon the r ea l reasons for the use of certain tac t ics by
the Chinese, i . e . , th is ant i -monopoly push against certain U.S. companies at
the moment?
I mean th is is not wit less on thei r par t , i t seems to me, and the fact
tha t they express some understanding to you as a technician doesn 't
40
overcome the pol i t i cs . I don 't th ink they' re in a posi t ion to overcome the
pol i t ics of the dynamic . It ' s a very ugl y dynamic i t seems that i s
developing, and I feel for you to be negot iat ing within that dynamic , but I
don ' t think the Chinese are unaware of what they want to do. The rule of
law doesn ' t ex is t r ight now, and how do you do this wi thout the rule of l aw.
Why do you have any increasing confidence in the ru le of law in China
r ight now?
MS. OHLHAUSEN: To answer one of your quest ions, at FTC and the
Depar tment of Jus t ice, we do engage wi th o ther agencies on these issues
and have d iscussions about them.
I do think the Chinese understand their interes ts , and certainly the
view that we are mainly a manufactur ing economy, we want to have low
input costs , and devalu ing IP r ights is the way to keep input cost s down.
But there are defini tely voices within China wh o are saying do we want to
be s tuck at th is l evel of development forever? Or don ' t we want to
t rans i t ion into a more innovat ive economy? And I have heard repor ts of
some indust r ies in China s tar t ing to say th is is hurt ing us internat ional ly
because the f act tha t as a Chinese business I 've created a new process and
every other Chinese business can rush in and copy that process because IP
protect ions are weak in China i s s topping me f rom being able to compete on
the in ternat ional s tage .
And so there are vo ices within China who are s tar t ing to say thi s does
not serve our long-term interests , and so we are t rying to engage with the
Chinese personal ly in a dual - t rack approach . One i s to say you say you 're
adhering to in ternat ional norms; here 's where you 've d eviated f rom them.
But the o ther i s to explain why i t i s in thei r long -term nat ional in teres t to
s tar t to adhere to those internat ional norms. And I don ' t mean to be naïve,
tha t I don ' t understand that there are very s t rong in terest s , and they are
ref lected in the way the AML was drawn, but I do bel ieve that our
engagement and our t rying to encourage them towards the good th ings and
discourage them from the things that we f ind dis turb ing is a useful use of
our resources as an ant i t rus t agency.
COMMISSIONER FIEDLER: Mark .
MR. COHEN: I might just add that f rom my perspect ive, there i s no
conf l ict . In fact , there is a t remendous synergy between intel lectual
property and rule of law and even human r ights in China. IP has been a
sandbox that the Chinese government has experimented in on the rule of l aw
issues - - t ransparency of judic ia l decis ions, special ized IP courts ,
avai labi l i t y of prel iminary injunct ions , professional izat ion of the judic iary,
inc luding judges increasingly with graduate degrees and tech nical ass is tants
so that they can focus on legal adjudicat ion , get t ing the judges a l i t t l e bi t
out of- -a l i t t l e bi t out of the pol i t i cal dynamic through profess ional iza t ion.
Al l of these things have been developing, some of them accelera t ing
more recent ly. I don 't want to be naive and say that these problems are
resolved . They cer tain ly are not , but I think IP has had a very posi t ive
effect on improving the special izat ion of the judiciary, on t ransparency, and
41
many o ther areas which have profound consequ ences for other areas . And
we 're talk ing about IP . We're talking about less than one percent of the
civ i l docket in China with about 3 ,000 plus IP judges.
This is a t remendous commitment and a t remendous leverage point , i f
you wil l , th rough the commerci al sys tem to t ry to ef fec t change in the
Chinese judiciary. Al l that being sa id though, I rea l ize that saying that thi s
is helping ru le of law doesn ' t address the problem of a U.S. company that 's
fac ing counterfei t ing or pi racy or whatever el se, and for t ha t we have to
advocate, we have to encourage them to use the courts because frequent ly
our own companies are shy of using the courts for a variety of reasons,
inc luding the percept ion that there 's too much of a government relat ions
cost to ad judicat ion in China or that i t wi l l be unfai r .
But we have to encourage them, and occasional ly we t ry to exert some
pol i t ical pressure on thei r behal f , but i t s t i l l i s in the works . It ' s jus t I do
bel ieve that IP has had a pos i t ive ef fec t on some of these legal
developments .
COMMISSIONER FIEDLER: Thank you.
CHAIRMAN REINSCH: Okay. Next is Commissioner Slane.
HEARING CO-CHAIR SLANE: Mr. Cohen, thank you for taking the
t ime to come. It ' s very helpfu l .
I have had American manufacturers who have developed technol ogy
tel l me that thei r at t i tude is that a patent as far as the Chinese are
concerned i s a blueprint , and their a t t i tude i s to not f i le patents but to go
down the t rade secret route, and my quest ion to you is are you seeing some
of that a t t i tude f rom Americ an manufacturers?
MR. COHEN: Well , there has always been a tens ion between patents
and t rade secrets . And, in fact , the Uniform Trade Secrets Act , was passed
in the late '70s before the federal ci rcui t was estab l ished, in part because of
the percept ion in the U.S . at the t ime that the patent sys tem was too weak.
So there 's always the sense that when patents get weaker , t rade secrets get
s t ronger in any society, and I think i t ' s a qui te legi t imate business approach
i f i t works because some things you hav e to patent because otherwise
people wi l l copy and you ' l l have no tool avai lable to you unless you have
the patent .
But otherwise a t rade secret approach of keeping your crown jewels
back in the U.S. or keeping the tools and dies or the secret formula ca n be a
good way of reducing your r i sk, and I th ink i t i s t rue that many U.S .
companies are reluctant to t ransfer thei r core technologies because of the
percept ion that they wil l ei ther be copied or thei r employees wil l leave and
repl icate i t or s teal i t o r they' l l be the target of indust r ial pol icy pract ices .
But some of these pract ices , jus t as a s ide note to that , a re not as
clandest ine as we might think . I 've seen one nat ional pol icy on the b iotech
sector that said that China should depend less on acqu i r ing technology and
more on employee migra t ion. That doesn 't say t rade secre t theft , but i f
you ' re saying that i t ' s easier for me to h ire people wi th the technology,
you 're obviously running that r i sk, and so, you know, i t ' s very interest ing.
42
When I meet wi th companies , and we 've done th is as an experiment
several t imes , and they come in to talk to us , and they' re in a part icular
f ield , I wi l l say to them, part icularly i f i t high tech, have you looked to see
i f there is a nat ional pol icy in thi s t echnolo gy or commodity? They say,
wel l , what do you mean? Wel l , give us f ive minutes , we get onl ine, we
look that maybe there 's a f ive -year p lan for carbon f iber technology or
maybe there 's a f ive -year p lan for wind turbines by a par t icular minis t ry,
and he says , wel l , i t says here this looks l ike th is area is one that the
Chinese government is very interested in .
It seems to me that i f you invest or t ransfer your technology, i t wi l l be
warmly welcomed, but you may run a r i sk that i t wi l l be s to len , and that
may not be because the Chinese government i s mandat ing i ts theft . It may
be that there are Chinese compet i tors that have to develop the technology,
and the easiest way for them to develop i t i s by lur ing away employees , just
l ike they would do in Si l icon Va l ley or anywhere el se in the world. It ' s just
a market , and where can you get i t at the cheapest cost?
But a lot of our companies are not aware of th is planned aspect of
technology that they' re walking into when they enter the Chinese market ,
and i f they would, they might develop appropriate prophylact ic s t rategies .
I think one of the other interest ing consequences of th is environment
in China is that i t ' s al ter ing the way companies conduct R&D. You know,
we have many of our companies , East Coast compa nies and West Coast
companies , pr ide themselves on kind of having an open R&D envi ronment ,
c ross- fert i l izat ion across sectors . And that 's exact ly the kind of
envi ronment that could be highly problematic in China.
If I can download everything f rom the com pany onto a USB that I need
in any technical area, wel l , I have a lot of valuable technology on that USB.
So i t ' s c reat ing more classi f ied zones of opera t ion and less cross -
disseminat ion, which is a problem, but i t a lso re la tes to this t rade secret
r isk that ' s endemic.
CHAIRMAN REINSCH: Commissioner Talent .
COMMISSIONER TALENT: Thank you.
Two quest ions. One i s a fol low -on to Mr. Fiedler 's . I agree with h im.
I think the Chinese are going to do what they bel ieve i s in thei r nat ional
interes t . So the quest ion i s - -and you, Commissioner , you adver ted to this - -
in your private conversat ions , discussions where you have a sense that
you 're get t ing s incere opin ions, how deep do you bel ieve is the commitment
and the bel ief that China is going to have to move for i ts own interest s and
i ts own economic fortunes to ass is t in where i t recognizes the rule of l aw
more in thi s area?
Do you rea l ly sense a commitment or a bel ief in that as an aspect of
Chinese nat ional interest when you talk with your counterparts and people?
Do they pul l you aside over tea and say, look, we know?
And the second thing is would you al l - - I mean we have to prepare a
report on what 's happening on thi s . Maybe you could give me your top
three successes in terms of your act ivi t ies or you r agency act ivi t i es in terms
43
of a Chinese response in thi s area? What would you say are the top three
things that you al l o r that the effor ts of your agencies have succeeded in
accomplishing?
MS. OHLHAUSEN: To address your f i rs t quest ion f i rs t , i t real l y
depends on who you 're ta lking to wi thin the Chinese agencies , and I wrote
an art ic le about how things are sort of happening behind the screen , and
sometimes you get g l impses of what 's going on, and sometimes i t ' s very
opaque. I have found that there are cer tain off icials , cer ta in important
academics in China, who are t rying to move their sys tem to a more
compet i t ion focused , IP protect ive sys tem.
When I was at the event that I ment ioned, there was a wel l -known
economics professor , they ca l led him "Market Wu," and he had been
persecuted during the Cul tural Revolut ion, and he 's been very di rec t in h is
cr i t i cisms of the Chinese government in these areas .
The other thing that I have found i s that , when las t September I gave a
speech that was rather cr i t i cal about some of the aspects of Chinese
ant i t rus t enforcement , the feedback, the behind -the-scenes feedback that I
got was we kind of wish you hadn 't said that publ ic ly, but , on the other
hand, i t was useful . Not just my cr i t i ci sm but the joint at tent ion f rom my
col leagues as wel l , help to push them towards taking, these cr i t i ci sms more
seriously.
And then the thi rd thing that I 'd ment ion is that I have been in China
and given th is cr i t i c ism at events and ta lked about the problems with thei r
approach to IP, and they have invi ted me back to cont inue to say these
things. So I do think that tha t does show openness to the d ialogue.
On the top three successes , the FTC and the Department of Just ice
reached a memorandum of understanding with the three AML, Chinese
AML, agencies in 2011. I think that was an important s tep forward. We do
have procedures in place for sharing case informat ion where appropriate ,
for t alking on pol icy and having technical ass is tance .
I think the commitments , the current commitments , i n the JCCT are an
achievement . We'l l see i f i t i s - -how that is implemented . I think that ' s
importan t .
And then the o ther thing that I would say is just the ongoing dialogue
that we have with the Chinese off icials , for me, i t 's easy. I fee l I can go
and I can say what i s on my mind. I 'm not worried about repercussions
from my own government; r ight? The worst that somebody could say is ,
you know, we wish you didn ' t say that . But I th ink in China, I a lways have
to keep in mind the greater pressures unde r which even wel l -meaning
off icials are operat ing. So I t ry to have sens i t iv i ty to that . The kind of
repercuss ions they could face i f they get out too far in f ront of what the ir
government wants them to do are very dif ferent than the kind of cr i t i cism
that I may face back here in the U.S.
MR. COHEN: Yeah. Let me just say Cohen 's three princip les for
engaging Chinese off icials : p rincipled, informed, and respectfu l . We need
to s t ick to our principles; we need to be highly informed. China tends to be
44
extremely informed both about thei r sys tem and our sys tem, and, of course,
no one is going to l i s ten to you unless you show respect . I think that i s as
t rue of the government diplomatic level as i t i s in the private sector .
And i t helps me because i f I ha ven ' t been principled then I feel l ike I
haven ' t done my job , and i f I haven ' t been informed, then I know I 'm not
going to make progress .
How has PTO helped make progress on IP and ru le of law? I have I
think four th ings where I think we 've had a demonst rable impact , and I l ike
to say that China crosses the rule of l aw river by feel ing the IP s tones . Let
me give you examples of those .
Transparency. You have a huge adminis t rat ive enforcement apparatus ,
not only in IP but in a variety of sectors , includi ng ant i t rust , but that ' s
actual ly a very smal l e lement compared to the numerous areas where there 's
adminis t ra t ive enforcement , and the Chinese government has commit ted to
make a l l adminis t ra t ive punishment decis ions in IP t ransparent and
avai lable onl ine, and they want to take that more broadly. That 's a big plus
for IP and for rule of l aw.
Second of al l , special ized IP court s , which I just ment ioned , more
professional with technical expert s that wi l l enable the cour ts to be
detached f rom the agencies th at they ru le over and with greater competence
in adjudicat ing cases .
A thi rd one, also judic ia l related, is increased criminal enforcement ,
and this real ly a l so shows you a l i t t l e b i t about how our engagement works.
We brought a case , a WTO case , agains t China for IP enforcement ,
inc luding ineffect ive cr iminal remedies , and i t was a mixed decis ion from
the WTO panel , but a year or two ago, a Chinese judge turned to me, and
she said, you know, back when you were at taché and you were complaining
about cr iminal enforcement , no one l iked to hear what you said. I sa id,
yeah , I know, i t was di ff icul t , and sometimes I wasn 't even invi ted to
conferences and programs because no one l iked to hear what I said.
And she said, “wel l , you know what we rea l ize now?” I said “what?”
“You were r ight ; we needed to improve our cr iminal enforcement regime.”
So sometimes you 're not going to be appreciated . Sometimes you get
your picture blown out of the f inal edi t ion that goes on the front page of the
In tel lectual Proper ty News, in my case. That 's okay as long as you 're
principled, informed, respect ful , and t ry and make a di f ference.
And I was very p leased to hear that f rom a senior judge that she fel t
tha t , in fact , I had ident i f ied a problem. China was not qui te ready to
accept i t , and f rankly I fe l t l ike that was my role: bring them a s tep forward
where they might not otherwise be but for that foreign observer saying this
is where you need to go.
The las t thing I 'd ment ion is PTO has brought China into two
communit ies : the IP5 and the Trademark 5 . These are the f ive largest
of f ices in the world . This was a U.S. ini t i at ive where we fel t that China as
a major patent and t rademark off ice that needed to part icipate global ly in
exchanging informat ion and bes t pract ices an d sharing common chal lenges,
45
and I think this has rea l ly helped China and the world in understanding
China 's ro le as an IP s takeholder .
It ' s not necessari l y the IP s takeholder with the same views we have,
but i t i s the s takeholder in the sys tem, and I thi nk those are importan t
venues for engagement .
CHAIRMAN REINSCH: These are real ly good quest ions and real ly
good answers , but they' re rea l ly long answers . We're running shor t on t ime
so I ' l l ask the witnesses i f they can condense a l i t t l e bi t as we go fo rward.
Commissioner Bar tholomew.
COMMISSIONER BARTHOLOMEW: Thanks very much and thank you
to both of our real ly interest ing wi tnesses . You know, I think that we are
al l real ly fortunate that you are wil l ing to dedicate your t ime and your
expert ise on al l o f these issues when you could undoubtedly be making a lot
more money not working in the publ ic sector , but thank you very much.
And i t ' s very interes t ing. I 'd l ike to just global ize this a l i t t le bi t ,
though, because every t ime I hear "internat ion al norms," which we 've been
talking about for 25 years when i t comes to China, I just keep wondering is
i t t ime for a paradigm shif t in our expectat ions of where China is going
because we cont inue to ab ide by a l l of the rules of f ree market capi tal i sm,
and we cont inue to somehow bel ieve that they are interested in abiding by
the rules of f ree market capi tal i sm when they say what they say and what
they do is that they don ' t intend to become ful l par t icipants in what we
know as free market capi tal ism, but tha t they have thei r own model of what
i t i s they want to do?
And so I just , I ge t very f rust rated , and I think you can hear i t among
some of the res t of us , that we are cont inuing to go down th is path
presuming that the end point is a wor ld that we see and we shape when I
bel ieve that the Chinese government has a d if ferent end point in mind.
So how do you reconci le that , and is i t t ime for us just to sort of al l to
accept that f ree market capi tal i sm is not where the Chinese government i s
intending to take thei r economy?
MS. OHLHAUSEN: Very brief ly, we have had a fa i r l y good t rack
record internat ional ly of advocat ing for compet i t ion, and I ment ioned the
ICN. There has been a lot of movement towards other new compet i t ion
regimes t rying to get to these kind of norms.
It ' s not a perfect t rack record certa inly and not by a long shot , bu t I am
concerned about giv ing up the engagement with the Chinese because the
quest ion then becomes should there be an Asian vers ion of compet i t ion law,
and i s i t jus t China or i s i t - - I 've been in Korea. Korea has some in teres t in
this . So I think i t ' s importan t for us to s tay in the business of t rying to
encourage the Chinese towards these internat ional compet i t ion, f ree market
norms.
COMMISSIONER BARTHOLOMEW: But just to c la r i fy, I 'm not
advocat ing that we don ' t engage because I think i t ' s rea l ly easy to say that
people who are asking quest ions are saying we don 't want to engage. I jus t
wonder whether we have to shi f t our own th inking about where i t i s the
46
Chinese government is intending to take that economy and the impacts on
the global economy? You know, when they joined the WTO, there were
quest ions about whether the WTO was going to change China or China was
going to change the WTO? And indeed China is changing the WTO.
So, again, I understand you guys are being as successful as you can be
in the context in which you 're working. It ' s jus t the b igger pic ture of where
the pol icies are going that I worry about .
Mr. Cohen.
MR. COHEN: Yeah, i t ' s a quest ion I 've f requent l y asked myself as
wel l , and I do think that when China joined the WTO, the expecta t ion was
that China would have more of a rules -based economy and would conform
to those di sc ipl ines . I think few people thought about how China would
affect the WTO and the global t rading sys tem, and I think few people have
thought about how China would af fect , in my space, the global IP sys tem.
But i t 's a fai r quest ion because this is a rec iprocal t ype of
arrangement , and we are seeing changes, and I think we al so have to
recognize that as China has exerted influence , and i t intends openly to exert
more influence , and there 's no secre t here. They advocated for a World
In tel lectual Proper ty Organizat ion off ice in Bei j ing; they got i t .
The las t major mult i lateral IP convent i on was the Bei j ing convent ion.
We can ' t be obl iv ious that China is a major player in the global IP sys tem,
and we 're not jus t the ones s tuff ing China 's throat wi th our views of the
world . They're going to come back with thei r own perspect ives .
In those di ffer ing paradigms, i f you wil l , i t ' s a lso important to note
that our vocabulary is d i f ferent . When we talk about IP r ights in thi s
audience, we 're ta lk ing about pr ivate ownership, we 're talk ing about a
property r ight , a patent that ' s described in metes and bounds . It goes back
to rea l property. You can own real property in this count ry. That 's a
problem in China.
When we talk about court cases , they are of a completely d i fferent
order of magni tude. I mean a court case in China is over in s ix months . A
patent case in the U.S. i s over in f ive years . The damages are hugely
dif ferent , too. The l ikel ihood of an injunct ion. These things al l mean --
they have a di fferent value , a di fferent weight , and they re late di fferent ly
with in thei r sys tem.
I think in order to make real progress in China, we have to point where
this sys tem is real ly swerving so far of f the highway that they' re no longer
in the mainst ream of what we mean by whether i t ' s a court case, a patent ,
how a patent sys tem works, government inv olvement in IP, and in some
cases they've deviated so far , we ' re t rying to yank them back. We have to
engage. We have to deal with a government that i s very ac t ively
manipula t ing or adjust ing elements , but we al so need to engage,
recogniz ing that there i s a very large chorus of people within China who
also are sympathet ic to our views. They want real property. They want
intel lectual property. They want to be able to reward themselves . They
want to develop innovat ive industr ies , and they' re as frust ra te d , i f no t more
47
so, than we are.
CHAIRMAN REINSCH: Thank you.
We're going to s teal a couple of minutes f rom the next panel i f they
don ' t mind to make sure that al l commissioners here at l eas t have a chance
for one round.
Commissioner Goodwin .
COMMISSIONER GOODWIN: Thank you, Mr. Chai rman, and, again ,
I 'd l ike to ex tend my appreciat ion to the panel for the tes t imony this
morning.
Real ly as a fol low -up to what was just said , one of the witnesses on a
panel that we 'l l hear f rom later this morning actual ly indicated in a piece he
wrote this summer that some of the recent AML enforcement ef fort s are
indicat ive of what he character ized as a t rade war, a long -term fight for
leading the global t ech indust ry and one that we wil l lose i f the U.S . does
not escal ate i ts response, including by rest ructuring our interagency t rade
enforcement process .
I 'd l ike to get the panel 's response to that characterizat ion of thi s being
a t rade war and thoughts for reorganiz ing our interagency enforcement
process and shi f t ing, as was sugges ted in th is piece , more cont rol to the
Trade Representat ive and the Department of Commerce.
MS. OHLHAUSEN: Given the fact that the AML does al low for
noncompet i t ion fac tors to be included in ant i t rust reviews, I do think there
is this cont inuing issue and problem that the t ype of analys i s that we would
do in the U.S . that would only focus on compet i t ion may be being done
dif ferent ly in China , and we need to cont inue to advocate back to them why
that 's a bad idea .
Thei r l aw al lows i t , and w e have asked them to be more t ransparent
about i f they are using these noncompet i t ion factors and then to turn away
from them because we don ' t think that that is consis tent with in ternat ional
ant i t rus t l aw, but al so ul t imately not good for the Chinese, and i t could
have long-term impacts on the wil l ingness of companies to invest in China.
So I do think f rom the ant i t rust po int of view, those are the tools tha t
we can br ing to bear . I do think that having some of these due process
concerns and compet i t ion fac tor concerns raised in something l ike the JCCT
is an important s tep forward.
MR. COHEN: Yeah, I 'm reluctant to characterize anyth ing as a t rade
war . I wi l l say that the tech sector in China today, i t ' s a very highly
oppor tunis t ic , compet i t ive, di f f ic ul t , government relat ions -intensive,
complex environment that can be ex tremely d if f icul t to navigate, and that
creates unique pressures on our companies , inc luding in compet i t ion law,
but not only, in tax pol icy, in patent pol icy, in the ab i l i t y to access the
cour ts when you 're compet ing with a local company, in t rade secret s where
local companies may have bet ter protec t ion through the pol ice compared to
a foreign company.
Al l these things can t i l t the balance and make i t more di f f icul t . China
does, you know, view technology as a key part of i t s indust r ial prowess. It
48
has f ive-year technology p lans, 15 -year technology p lans , and i t has sector -
specif ic plans, some of which I ment ioned earl ier , and I think there , the
degree to which they've made i t a key con cern of thei r industr ial
development is an important ca l l to Americans that we can ' t s i t on our
compet i t ive edge.
I mean PTO, we don ' t enforce anyth ing so I can speak a l i t t le bi t more
freely in that sense, but I think we v iew our role in the in teragency as
t rying to provide a more informed bas is for decid ing on pol icy issues ,
providing more empirical data to suppor t bet ter decis ion -making, and being
able perhaps a l i t t l e bi t bet ter to ant icipate where China is headed. That 's
not the shock t roops of any t rade war. That 's just t rying to help make more
informed decis ions in helping our companies move forward.
CHAIRMAN REINSCH: Okay. Thank you.
I think in the interest of t ime s ince we 're over our end point , I 'm going
to forego my quest ions , and those o f you who wanted a second round, you
lose. I 'm sorry. But you 've been great wi tnesses . You 've provided a lot of
food for thought . We may have you back another t ime, and we ' l l give you
more t ime. But we appreciate the completeness of your responses and the
thought behind them.
So with that , we 'l l thank you, and we ' l l move on to the next panel ,
which Commissioner Slane wil l int roduce.
[Pause .]
49
PANEL I INTRODUCTION BY COMMISSIONER DANIEL M. SLANE
HEARING CO-CHAIR SLANE: In this panel , th ree indust ry expert s wil l
detai l the most recent and pressing chal lenges facing foreign f i rms
operat ing in China. We wil l hear perspect ives from the auto manufactur ing
and informat ion technology indust r ies , and we 'l l di scuss how Chinese law
impacts foreign bu s iness there .
Joining us today is Dr . Rob Atkinson. Dr . Atk inson is the President of
the Information Technology and Innovat ion Foundat ion . Before joining
ITIF, Dr . Atkinson was Vice President of the Progressive Pol icy Inst i tute
and Director of PPI ' s Technology and New Economy Project .
He current ly serves as co -chair of the White House Office of Science
and Technology Pol icy's China -U.S . Innovat ion Pol icy Experts Group and is
a member of other commit tees at the Departments of State and Commerce .
Next we welcome Dan Harris , who t raveled here al l the way f rom
Seat t le . Mr . Harri s is the founding member of Harris Moure , an
internat ional l aw fi rm that focuses on represent ing American companies
overseas .
Mr. Harris wri tes and speaks ex tens ively on interna t ional law with a
focus on protect ing foreign bus inesses in thei r China operat ions . He is al so
a prol i f ic and widely- fol lowed blogger , wri t ing as the coauthor of the
award-winning China Law Blog.
Unfortunately, our f inal wi tness , Dr . Oded Shenkar , was un able to
at tend the hearing today. We're sorry to hear tha t h is wi fe had a medical
problem. Dr. Shenkar serves as the Ford Motor Company Chai r in Global
Business Management at the Ohio S ta te Universi t y 's Fisher Col lege of
Business .
He is also a member of the Center of Chinese Studies and for Near East
Studies . Dr. Shenkar has publ ished severa l books, including his most
recent book, Copyca ts : How Smart Companies Use Imitat ion to Gain a
Strategic Edge.
Dr . Shenkar has previously tes t i f ied before the Commi ssion . His
wr i t ten tes t imony for this panel can be found on the Commission 's Web
s i te .
Gent lemen, thank you very much for being here today. Each of you
wil l have seven minutes to del iver your oral s tatement . Dr . Atkinson, we ' l l
s tar t wi th you.
50
OPENING STATEMENT OF ROBERT D. ATKINSON, PH.D.
PRESIDENT, INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION
DR. ATKINSON: Thank you so much. I appreciate the opportuni ty to
appear before the Commission today to talk about these issues .
I ' l l jump r ight in and say I think we need to think about where China i s
on these i ssues around discriminat ion against fore ign d irec t investment in
the context of a s t ra tegic shi f t that the Chinese government made in the
mid-2000s, essent ia l l y f rom a long -term pol icy f rom the e ar ly '80s of
at t ract ing FDI and bui lding thei r economy up through being fr iendly to FDI
to a fundamental ly dif ferent s t rategy, which they cal l "indigenous
innovat ion," which is al l about bui lding up Chinese companies and
part icular ly Chinese companies in t echnology f ields .
I think this was a fundamental s t rategic shi f t for how we think about
this , at least how our companies think about this . I think , as you al l know,
in the '80s when we had our t rade war with Japan, essent ia l l y i t was our
companies agains t thei r companies , and so there was a lot of consensus here
in America that we needed to be aggressive going after the Japanese. We
don ' t have that as much with China because essent ial l y our companies
benefi ted s igni f icant ly f rom the Chinese pol icies , and so i t was real ly our
workers , i f you wil l , against the Chinese government , the Chinese pol ic ies .
Today I think that ' s changing, and i t ' s becoming a l i t t l e bi t more l ike
the prior Japanese relat ionship . Essent ial l y, i t ' s now American companies
versus Chinese companies , and I think that ' s an important s t rategic shi f t .
We're not al l the way there yet , bu t increasingly American companies ,
part icular ly in the technology f ie lds , a re f rus t rated with the t reatment
they' re get t ing.
What 's going on here? As th e Chinese government adopted indigenous
innovat ion s t ra tegy in 2006 they have thrown a lot things a t the wal l to see
what works and what doesn ' t work . One of the th ings they threw at the wal l
was the indigenous innovat ion product catalog sys tem. Where th ey weren ' t
able to ful ly implement that the way they would have l iked , now since
President Xi J inping assumed power, they've real ly taken th is whole
s t rategy to a new level "to mas ter i ts own technologies ," as they say.
And that s t rategy has essent ial l y b een using the heavy s t ick of
harassment of U.S . t echnology companies in a wide var ie ty of forums and
means in order to get what they want , which is essent ial l y much more, as
Mr. Cohen said , much more favorable terms on IP l icensing and , more
importan t ly, more favorable terms on technology partnerships , us ing th is
harassment , this s t i ck , this threat , in order to force U.S . high technology
companies to partner with Chinese companies as a way to get technology.
And las t l y, i t ' s par t ly a s t rategy to hobble U.S . companies because
weaker U.S. companies make i t easier for their domest ic champions to
thr ive in the Chinese market .
This al l a lso ramped up a whole level af ter the Snowden revelat ions .
Snowden was an incredible gif t to the Chinese government because i t gave
51
them an excuse and a just i f icat ion: wel l , you do th is so we get to do this .
And we see that . I ' l l explain that in jus t a moment .
So we 've seen that obviously in terms of using AML to raid the
Microsoft faci l i t i es . We've seen i t wi th the Qualcomm and Cisco cases
where the NDRC cla imed that they were monopol is ts . We've seen i t wi th
they ca l l the "de -IOE Campaign ," that i s a nat ional campaign to pressure
s ta te -owned enterpr ises to not use IBM, Oracle or EMC products , k ind of
three core enterprise p roducts that you need in a company, and replace them
with Chinese -owned ones .
I even more t roubl ing i s what 's go ing on in the las t couple of weeks,
and this is a new Chinese pol icy essent ial l y to , quote, "require secure and
cont rol lable cyber and ICT prod ucts . "
And what they mean by that is they' re using th is excuse to say that
they have a legi t imate r ight under the WTO to have except ions for
government procurement and other kinds of pol ic ies on the securi ty
exemption, and th is is l a rgely and clear ly an e xcuse . There is no real
viabi l i t y to the argument , bu t they' re us ing that argument now very
aggressively to say that unless the technology in China i s developed in
China or cont rol led by China that essent ial l y they have the r ight to preclude
foreign IT products from thei r market .
This is very, very t roubl ing, and I think we 're going to see that ramp
up to an even higher level . So what 's behind th is shi f t? As I said , I think
what 's behind thi s shif t now is that they real ly fee l l ike some of the other
pol icies they t r ied to do with indigenous innovat ion didn 't get them what
they wanted, and they' re ramping this up.
So what should the U.S . government do? I th ink that there are a
number of specif ic things, bu t l et me talk about three or four high - level
things that I think are cr i t i cal to get r ight .
Fi rs t o f al l we have to rea l ize that th is harassment s t rategy, this heavy s t ick
s t rategy that the Chinese government i s employing, is now a core par t of
the Chinese s t ra tegy, and i t ' s no t going to change unle ss the Chinese
government real izes that i t has costs , and cos ts meaning f rom external
players l ike the Uni ted States government .
While I agree with much of what was said on the prior panel , there i s
learning going on. I exper ienced that personal ly. The Chinese government
t rans la ted our book into Chinese which is very cri t i ca l of the Chinese
government—because there are many people in the Chinese sys tem that
want to learn . I don 't deny that . But I think fundamenta l ly the people who
are engaged in this harassment s t rategy are the dominant players in the
Chinese sys tem now. They know exact ly what they want , and they' l l keep
doing i t .
We have to real ize what the end game here i s . The end game is not
just de- IOE. It ' s de -U.S.A. technology. It ' s de -Microsoft . It ' s de - Intel .
It ' s de-Qualcomm. It ' s essent ial l y replacing al l U.S. t echnology in China
with Chinese -owned technologies , then using that to , as the Chinese
52
government says , “go out” and gain markets global ly. Now they' re not
going to assaul t our markets ini t ia l l y, but they' l l go into thi rd -party markets
to gain share and take i t away f rom U.S . companies .
The second s tep i s that the adminis t rat ion, whether i t 's th is
adminis t ra t ion or the next adminis t rat ion, whatever par ty that might be,
needs to make f ight ing this high -tech harassment a much higher priori t y. It
needs to be a higher priori t y f rankly than human r ights in China. It needs
to be a h igher pr iori t y than North Korea . It needs to be a higher priori t y
than cl imate change .
We have to ac t in our own interests on this , and unless we s tand up and
say we 're going to do i t , no one is going to do i t for us .
A thi rd area i s we need to move away f rom a process -orien ted t rade
regime wi th China to a resu l ts -orien ted one. P rocess -oriented t rade r egimes
work wel l wi th countr ies l ike those in Europe that aren ' t t rying to
manipula te the sys tem, and we can f i l e WTO cases against them. We can
negot iate with them. We win some; we lose some.
That real ly doesn’t work wi th China . They're too sophis t ica t ed to get
t r ipped up with the TRIPS regime, to make a pun, or with the WTO, in
general , and I think the only real answer is we have to se t a set of resul ts
we th ink we want f rom China. We have to hold them accountable for those
resul ts , for making progre ss on those resul t s .
Fourth , we need to fundamental ly change how we think and act about
t rade enforcement . The incent ives are a l l on the s ide of market opening for
USTR and real ly for any adminis t rat ion. It ' s about how many t rade
agreements can you s ign , and, just to be clear , we ' re very support ive of the
Trans -Paci f ic Partnership. We're very suppor t ive of a t rade agreement with
Europe.
That 's not the issue. The i ssue is balancing market opening with t rade
enforcement , and r ight now I think that ' s out of balance . So we need to just
do much more to s tep that up. I think Congress has a key ro le there . USTR
is , I think , s ignif icant ly underfunded when i t comes to t rade enforcement .
They need a Trade Enforcement Officer .
Related to that , I th ink the int eragency process doesn 't real ly work in
our interes t in this space. The interagency process tends to be dominated
by the agencies that would ra ther make nice than press hard agains t China.
And I 've seen that . When I go to the S&ED meet ings , I watch that . USTR
tends to be pret ty aggressive . Commerce tends to be pret ty aggressive , but
many of the other agencies don ' t want to rock the boat . They have e i ther
other i ssues that they' re in teres ted in pursu ing. We saw that , for example,
on the Microsoft case where Department of Just ice was s i lent , bu t could
have made a publ ic s ta tement that thi s was inappropriate use of an t i t rus t
law and chose not to .
And las t l y- - I 'm over my t ime. I apologize. Las t ly, the idea we 've
thrown out as an interest ing proposal is to give U.S . companies ant i t rust
exemption for col laborat ion against government act ions l ike thi s .
One of the problems is i t ' s a monopsony envi ronment - - the b ig buyer ,
53
mult iple sel lers , i f you wil l . If U.S . companies could col laborate with each
other and with European companies to essent ial l y say we just s imply wil l
not invest in China unless you take these act ions .
Right now, for example, we see China playing off of Boeing and
Airbus against each other for who can give them the most t echnology
t ransfer because they have the largest and fastes t -growing jet ai rplane
market in the world. If we had an ant i t rust exemption , Boeing and Airbus
could col laborate and say we 're going to not give technology to the Chinese
more than what we would want to normally, and thi s would give a l i t t l e bi t
more of an equal bargaining relat ionship.
So, in closing, I would say that I don ' t see thi s problem going away
any t ime soon. I ac tual ly th ink i t ' s going to be an even higher and worse
problem in terms of high -tech harassment from the Chinese government .
And I think unless we begin to take more serious act ion that shows them
that we 're serious , that they wil l cont inue to ramp this up.
Thank you.
54
PREPARED STATEMENT OF ROBERT D. ATKINSON, PH.D.
PRESIDENT, INFORMATION TECHNOLOGY AND INNOVATION FOUNDATION
Testimony before the U.S.-China Economic and Security Review Commission
Hearing on Foreign Investment Climate in China
January 28th, 2015
Dr. Robert D. Atkinson
President
Information Technology and Innovation Foundation
Thank you inviting me to testify before the Commission. I appreciate the opportunity to appear
before you today to discuss the impact of Chinese government policies on the foreign investment
climate in China.
I am President of the Information Technology and Innovation Foundation. ITIF is a nonpartisan
research and educational institute whose mission is to formulate and promote public policies to
advance technological innovation and productivity. Recognizing the vital role of technology in
ensuring American prosperity, ITIF focuses on innovation and productivity issues, including in
the context of foreign trade.
The Shift to “China Inc.” Through Indigenous Innovation
From the early 1980s—when Deng Xiaoping made the decision to open China up to international
investment—until the mid-2000s, the core economic development strategy for China was the
active encouragement of foreign direct investment through a vast array of incentives, including
tax incentives, free land, limited regulations and of course, government controls to keep the
renminbi undervalued. The goal was to do whatever it took to induce foreign multinational
corporations to move production to China. While the consequences of these policies might not
have always been good for the U.S. economy, and especially for many U.S. production workers
in traded sectors, U.S. multinational corporations benefited from access to a low-cost, global
production platform. And Americans in their role as consumers benefited from lower cost goods.
And while China occasionally engaged in policies that brought complaints from U.S. industry,
by and large U.S. industry was satisfied with the relationship.
In 2006, that began to change. For that was when China made the strategic decision to shift to a
“China Inc.” development model focused on helping Chinese firms, often at the expense of
foreign firms. Chinese Communist Party leaders decided that attracting commodity-based
production facilities from multinational corporations was no longer the goal. The path to
prosperity and autonomy was now to be “indigenous innovation” (or in Chinese, zizhu
chuagnxin) built around Chinese-owned firms.
The seminal document advocating this shift was “The Guidelines for the Implementation of the
55
National Medium- and Long-term Program for Science and Technology Development (2006-
2020).” The so-called “MLP” sought to “create an environment for encouraging innovation
independently, promote enterprises to become the main body of making technological innovation
and strive to build an innovative-type country.”1 This was much more than a strategy to target
some key areas where China had some preexisting capabilities. Rather, the MLP “must be made
a national strategy that is implemented in all sectors, industries, and regions so as to drastically
enhance the nation’s competitiveness.”2 The MLP called on China to “master core technologies”
in virtually every area Chinese state planners could imagine. Included were some 402
technologies, from intelligent automobiles to integrated circuits to high performance computers.
After the MLP, China began to seek the capability to master virtually all advanced technologies,
with the focus on Chinese firms gaining those capabilities through indigenous innovation.
Since 2006, China has shifted more to the Japanese and Korean model of development based on
helping its own domestic companies grow by moving up the value chain and gaining global
market share. The tactics involve massive government subsidies, theft of foreign know-how, and
forced technology transfer in exchange for market access, massive export subsidies, and
discriminatory government procurement. This is perhaps why, according to an ITIF study, China
ranks as the most mercantilist nation in the world.3 The goal is for Chinese companies to
ultimately supplant foreign technology companies both in China and in markets around the
world. As such, conflict now exists not just between American and Chinese workers; but
between American companies and Chinese companies, just as it did between Japanese
companies and American companies in the 1980s and 1990s.
Rising Attacks on Foreign Multi-National Corporations
Since President Xi Jinping assumed power in 2012, China has rapidly accelerated its efforts to
promote “indigenous innovation” but not just using the “carrot” to help Chinese firms but also
the “stick” to harass foreign producers. Xi has stated that China must “master its own
technologies” to not only promote growth, but national security.
And under President Xi the shift to indigenous innovation has taken another turn. Increasingly,
foreign firms face outright discrimination by Chinese governments. The American Chamber of
Commerce stated in China’s 12th annual “Business Climate Survey” that American business
owners are increasingly concerned about discriminatory government regulations and other
policies that favor domestic companies. The fact that these actions have targeted technology-
based sectors such as autos, information technology and life sciences is no accident: these are
key technology sectors that China is seeking mastery in.
China discriminates against foreign firms through a number of different means, including tax,
1 “CPC Central Committee's Proposal on Formulating the 12th Five-Year Program on National and Social
Development,” Xinhua, (adopted on 18 October 2010 at the Fifth Plenary Session of the 17th CPC Central
Committee, Beijing, October, 2010). 2 “National Medium- and Long-Term Program for Science and Technology Development of China (2006-2020): An
Outline,” Wenzhou, January 2, 2012, http://english.wzkj.gov.cn/program/program_detail.aspx?id=1. 3 Michelle Wein, Stephen Ezell, and Robert Atkinson, “ The Global Mercantilist Index:
A New Approach to Ranking Nations’ Trade Policies”, (Washington, DC: Information Technology and Innovation
Foundation, 2014).
56
transfer pricing, antitrust, visa, and customs laws. For example, as far back as 2009, Compliance
Week noted, “The [Chinese] government does indeed seem to be giving the local companies a
pass. While bureaucrats are raiding foreign-run factories, imposing sizable punishments on
multinationals, and making demands on transactions that have little to do with China,
enforcement of other domestic regulations come up almost comically short.” The article goes on
to note, “While the regulators are going after foreign companies, they appear to be taking it easy
on local enterprises…This double standard may indicate that the great enforcement crackdown is
as much a matter of industrial policy as it is an effort to raise taxes and prevent economic
concentration.”4
We saw this initially with how the Chinese government treated Google. Google pulled out of
China because of discriminatory treatment. (It is even thought possible that China intentionally
slowed down Google search results and disrupted service in other ways.)5 As Nick Yang,
cofounder of several Chinese technology companies, stated, “The Chinese government itself
does not have a positive and supportive view of foreign search engine companies in China.”6
Using the rationale of maintaining social control, the Chinese government also blocked U.S. tech
companies Facebook and Twitter.
Around two years ago, the Chinese government added a new tactic directly attacking foreign
companies. One basis of the attacks is that U.S. technology products were not secure and
therefore the government had the right to intervene. One tool of these attacks is a propaganda
campaign carried out in the state-controlled media, with multiple articles claiming that U.S. tech
company products were not secure, with one government blog threatening “to severely punish
the pawns of the villain.”7 These attacks happened at the same time Xi took over the reins of a
new Communist Party-led committee on cybersecurity. It's hard to underestimate the role of
Edward Snowden's NSA revelations in this change of tactic. Before Snowden, the Chinese
government was reticent to play this intimidation card. But Snowden gave the cover it needed for
the Chinese government to claim the moral high ground and go after U.S. tech companies on
trumped-up charges of lack of security.
In 2014, the Chinese central government ruled that government offices were prohibited from
running Windows 8 (although many if not most Chinese government offices steal, rather than
purchase Windows anyway). Soon after investigators from China's State Administration for
Industry and Commerce raided Microsoft facilities in four Chinese cities, claiming it was
investigating whether Microsoft violated China's anti-monopoly laws. The Microsoft case was
not the first attack on U.S. technology companies. Over the last several years, virtually every
leading American IT company has found itself in the Chinese cross hairs. Apple CEO Tim Cook
was forced to publicly apologize for purported problems with iPhone warranties. Next up was
Qualcomm and Cisco, with the National Development and Reform Commission claiming that
both were monopolists. Around the same time, the Chinese government announced their “De-
IOE campaign” to pressure Chinese companies to replace their IBM, Oracle and EMC products
4 Richard Meyer, “China Whets Its Enforcement Appetite,” Compliance Week, January 12, 2009,
http://www.complianceweek.com/china-whets-its-enforcement-appetite/printarticle/186600/. 5 Steven Levy, “Inside Google’s China Misfortune,” CNN Money, April 15, 2011,
http://tech.fortune.cnn.com/2011/04/15/googles-ordeal-in-china/. 6 Yinglan Tan, Chinnovation: How Chinese Innovators are Changing the World (New York: John Wiley & Sons,
2011), p. 254. 7 http://thediplomat.com/2014/06/china-steps-up-attacks-on-us-tech-firms/
57
with Chinese made ones.
The harassment of Microsoft appeared to be a tit-for-tat response to the Justice Department
indictment in 2014 of five Chinese military offices for hacking into U.S. companies’ computers
to steal trade secrets. Indeed, the Chinese government has shown time after time that it doesn't
just act to even the score when the U.S. takes action against China; it responds with
overwhelming force. But these and other trumped up charges are part of a broader effort by the
Chinese government to hobble U.S. technology companies in China, promote China's domestic
IT industry, and ultimately replace the U.S. as the world's IT leader. This high-tech harassment
will in all likelihood continue until China finally gets what it wants: the complete replacement in
China of foreign technology companies with Chinese ones.
It's easy for the Chinese government to use Chinese law as an industrial policy weapon, as there
is no real rule of law and their regulations, like their anti-monopoly law, give the government
carte blanche ability to go after any foreign company for almost any reason, trumped up or
legitimate. Indeed, China’s 2007 anti-monopoly law is designed to treat legitimately acquired
intellectual property rights as monopolistic abuse, with Article 55 stating, “This Law is not
applicable to undertakings’ conduct in exercise of intellectual property rights pursuant to
provisions of laws and administrative regulations relating to intellectual property rights; but this
Law is applicable to undertakings’ conduct that eliminates or restricts competition by abusing
their intellectual property rights.”8 And for the Chinese government, abuse means charging
market-based IP licensing fees to Chinese companies. This provision has been used to take legal
action against companies whose only “crime” is to be innovative and hold patents... Indeed, the
Chinese law allows compulsory licensing of IP by a “dominant” company that refuses to license
its IP if access to it is “essential for others to effectively compete and innovate.”9 And with the
courts largely rubber-stamping Communist dictates, foreign companies have little choice but to
comply. And all too often, complying means changing their terms of business so that they sell to
the Chinese for less and/or transfer even more IP and technology to Chinese owned companies.
All too often the Chinese government makes foreign technology companies “an offer they can’t
refuse.”
Chinese Indigenous Standards Setting
China has coupled its high-tech harassment with the aggressive development of indigenous
technology standards, particularly for information and communications technology (ICT)
products. Indeed, indigenous standards setting has become a core component of its industrial
development and economic growth strategy. China has done so believing that indigenous
technology standards will advantage domestic producers while blocking foreign competitors and
reducing royalties Chinese firms pay for foreign technologies.
Most technology and product standards around the globe are developed through international,
voluntary, industry-led efforts. Firms meet and agree upon standards that are then used
throughout the world. But China has taken a different approach. China’s government has sought
8 “Anti-Monopoly Law of the People’s Republic of China.” 9 James McGregor, “China’s Drive for ‘Indigenous Innovation’ A Web of Industrial Policies,” (working paper,
APCO Worldwide), p. 15, www.uschamber.com/sites/default/files/reports/ 100728chinareport_0.pdf.
58
to shape technology markets as best it can to afford advantages to Chinese enterprises. Indeed,
since at least the 1990s, China’s government has funded the pursuit of unique exclusionary
standards embodying Chinese proprietary technology as part of that effort. China’s institutions of
standardization place the state at the center—making China’s government the initiator, financer,
and leader of most standardization projects.10 As noted, China’s animating goal has been to
develop homegrown technology standards both as a way to gain competitive and, hopefully,
monopolistic advantage, and to reduce Chinese dependence on foreign technologies and the
royalties Chinese enterprises have to pay for those technologies.
As the “Study on the Construction of National Technology Standards System” released by the
Standards Administration of China (SAC) in 2004 framed it, China’s standards approach sought
to: (i) lessen the “control of foreign advanced countries over the PRC [People’s Republic of
China],” especially “in the area of high and new technology”; and (ii) increase the effectiveness
of Chinese technical standards as important protective measures or barriers to “relieve the
adverse impact of foreign products on the China market.”11
China’s focus on developing technical barriers to trade, such as indigenous technology standards,
only grew in importance after China joined the World Trade Organization in 2001, in part
because, as China scholar Dieter Ernst notes, “China’s accession commitments to the WTO have
substantially reduced the use of most other trade restrictions such as tariffs, import quotas, and
licensing requirements.”12 More recently, China’s 12th Five-Year Plan (covering the years 2011
to 2015) proposed to “encourage the adoption and promotion of technical standards with
indigenous intellectual property rights.”13 As one Chinese official explains China’s prevailing
view of technology standards: “Third tier companies make products; second tier companies make
technology; first tier companies make standards.”
This mindset has led China to pursue an aggressive standards development strategy. In fact, by
the late 2000s, China was launching well over 10,000 standards development, reform, or
implementation projects per year.14 While most of those standards are comparable or identical to
international standards, the reality is that China continues to pursue unique national standards in
a number of high technology areas, even where international standards already clearly exist.15 As
a result, China lags significantly behind other nations in developing a pro-innovation standards
10 Michael Murphree, “Building Markets: The Political Economy of Technology Standards” (PhD diss.,
Georgia Institute of Technology, May 2014),
https://smartech.gatech.edu/bitstream/handle/1853/51821/MURPHREE-DISSERTATION-2014.pdf. 11 James McGregor, “China’s Drive for ‘Indigenous Innovation’: A Web of Industrial Policies” (U.S.
Chamber of Commerce and APCO Worldwide, 2010), 5–6,
https://www.uschamber.com/sites/default/files/legacy/reports/100728chinareport_0.pdf. 12 Dieter Ernst, Indigenous Innovation and Globalization: The Challenge for China’s Standardization Strategy
(IGCC, 2011), 24, http://igcc.ucsd.edu/assets/001/501951.pdf. 13 Terence P. Stewart et al., China’s Support Programs for High-Technology Industries Under the 12th Five-
Year Plan (Law Offices of Stewart and Stewart, June 2011), 86. 14 Michael Murphree and Dan Breznitz, “Standardized Confusion? The Political Logic of China’s
Technology Standards Policy” (working paper, Industry Studies Association Conference, May–June ,
2011), 24, http://www.industrystudies.pitt.edu/pittsburgh11/documents/Papers/PDF%20Papers/5-
1%20Murphree.pdf. 15 Office of the United States Trade Representative (USTR), “2014 National Trade Estimate Report on
Foreign Trade Barriers” (USTR, May 2014), 63.
59
policy. In fact, according to the WTO, in 2007 only 46.5 percent of Chinese national standards
were equivalent to international standards.16 Moreover, as of 2007, approximately 14.5 percent
of national standards, 15 percent of professional standards, and 19 percent of local standards in
China were mandatory.17 (And even voluntary standards can become mandatory if they are
referenced as part of mandatory conformity assessment procedures.) Moreover, China does not
have a history of allowing foreign participation in its standards-setting process. As noted, China
drafts many of these standards without foreign, or even public, input. And in many cases, even if
foreign representatives are allowed to participate at all, they can do so only as observers with no
voting rights.
But because the Chinese government knows that it has considerable “market power” over foreign
companies due to its sheer size, it knows that unless challenged by other governments or the
WTO, it has leeway in unilaterally setting technology standards to favor domestic firms or to
force foreign firms to pay licensing fees. And in no sector of the economy has the Chinese
government been more aggressive in developing indigenous technology standards than with
regard to information and communications technologies; it has developed its own standards in
wireless networking, mobile television, wireless storage, computer security, terrestrial television,
digital satellite television, Internet protocol television, video codecs, digital rights management,
the Internet of Things, and many other technologies. (See Figure 1.)
What’s Behind the Shift in Chinese Strategy?
At one level, this shift of Chinese strategy to not just proactively favor its own domestic
companies but to actively attack foreign companies seems perplexing. Why alienate the very
companies that can provide needed investment in your country? The answer appears to be that
the Chinese leadership feels that now is the time for Chinese companies, particularly technology
companies, to achieve global leadership positions and that a key way to do this is to step up
attacks on foreign technology companies, in part to hobble them, but to also extract concessions
from them, particularly on intellectual property licensing terms and on tech transfer conditions,
including “requiring” U.S. tech companies to partner with Chinese-owned technology companies
as the solution to end their government harassment. With regard to domestic standards setting, in
many cases China is trying to strip others’ intellectual property from these standards in order to
avoid paying royalties. At the same time, if they are to succeed in their “going out” policy, which
seeks to encourage Chinese firms to become multinational with global reach and global brands,
they feel that aggressive action against competitors is warranted.
Why This Strategy Hurts the U.S. and Global Economies
These Chinese policies toward U.S. MNCs clearly damage U.S. MNCs. They weaken their
competitive position in not just the Chinese market but global markets. They reduce sales. They
16 Scott Kennedy, Richard P. Suttmeier, and Jun Su, “Standards, stakeholders, and innovation: China’s
Evolving Role in the Global Knowledge Economy” (Special Report no. 15, National Bureau of Asian
Research, September 2008), 24,
http://www.nbr.org/publications/specialreport/pdf/Preview/SR15_preview.pdf; Breznitz and Murphree,
“The Rise of China in Technology Standards,” 36. 17 World Trade Organization, “Restructuring and further trade liberalization are keys to sustaining growth”
(news release, WTO, June 2, 2010), http://www.wto.org/english/tratop_e/tpr_e/tp330_e.htm.
60
reduce profits, especially related to the ability to monetize investments made in the production of
intellectual property.
But some argue that we shouldn’t worry if U.S. firms are harassed by the Chinese government.
Only they will get hurt and that it serves them right anyway for investing there in the first place.
This view ignores the fact that the health of the U.S. economy is still based significantly on the
health of U.S. multinationals, even ones that have moved much of their actual production
offshore. The rapid decline of U.S. tech companies in China directly threatens the long-term
economic prosperity and national security of the United States. If these policies are allowed to
continue, we may soon see more U.S. tech companies falling behind, replaced by their Chinese
competitors. For example, in 2014, the Chinese State Council released a strategic plan to
dominate the global semiconductor supply chain by 2030. And while a company like Baidu is
not likely to replace Google in America or Europe, it is intensely fighting for market share in
other contested markets like Africa. As a thought experiment, what world would be better for
America: a world where U.S. tech companies control 30 to 40 percent of the global market or
one where they control 5 to 10 percent? Clearly the latter scenario is one of real decline for U.S.
economy and national security.
These Chinese actions also harm the global innovation system—and especially markets for
innovative products such as ICTs—in a variety of ways. Their standards policies fragment global
markets, reducing scale. This is problematic because most ICT products exhibit high fixed costs
(it costs a lot to develop the first product) but lower marginal costs (it costs less to produce
subsequent products). Balkanized markets mean higher global costs of production which mean
both higher prices and lower profits, the latter of which is important because companies need to
earn profits in order to reinvest them in the risky and expensive investments required to produce
the next generation of innovative technologies, such as next-generation semiconductors or
mobile phones. Chinese IP policies, including harassment designed to force foreign MNCs to
license IP at a steep discount also reduces the returns from innovation, making it harder to invest
in the next round of innovation. In other words, because innovative industries principally
compete not by making existing products cheaper but by inventing next-generation versions of
the product (e.g., Intel competes not by making existing semiconductors cheaper and cheaper
over time, but by inventing next-generation microprocessors), profits from one generation of
innovation are vital to financing investment in the next.
Indigenous technology standards also add unnecessary costs for enterprises developing ICT
products, such as by forcing them to develop a variety of versions of mobile phones or tablet
computers to accommodate differing wireless network technology or encryption standards in
different countries. And because those dollars could have gone into lower prices or investments
in innovation and technology development instead of accommodating differing technology
standards, countries’ requirements for indigenous technology standards lower the global stock of
innovation, to the detriment of all consumers globally.
Why Do U.S. Firms Accept Such Abuse?
Few U.S. multinationals are likely happy with how they are being treated in China. Indeed, there
appears to have been a marked shift in attitude of U.S. multinationals doing business in China
61
over the last decade. This has shifted from an attitude of “it’s a nation with problems, but the
market is so big and fast growing that we will put up with it” to “this is fundamentally
unacceptable behavior.”
But why don’t U.S. companies just pack up and leave when confronted with capricious and
detrimental government actions? This kind of discrimination if implemented by a smaller nation
would be rejected out of hand by multinational corporations. For example, while the forced
technology transfer practices of a nation a like Argentina are onerous, their economy it is small
enough that many companies would rather give up on the Argentinean market than succumb to
the strong arm tactics. U.S. multinationals have much less room to maneuver with China since it
is the world’s second largest economy. This is why, in a 1999 survey of U.S. executives doing
business in China by the U.S. Bureau of Industry and Security, “the majority of industry
representatives interviewed for this study clearly stated that technology transfers are required to
do business in China.”18 Foreign companies capitulate because they have little choice; they either
give up their technology or lose out to other competitors that are willing to make the essentially
Hobson’s choice. Industrial organization economists refer to this type of market as
monopsonistic: having one buyer that can set largely whatever terms it wants against competitive
sellers.
Conceivably if another large nation, such as India, were to emerge as having a favorable business
climate for investment—that is, good infrastructure, low taxes, rule of law, protection of IP, and
a welcoming attitude toward FDI—U.S. and other foreign multi-nationals would, at least at the
margin, likely shift investment to that nation. But to-date no large nation, including India,
appears close to being able or willing to do that. Moreover, virtually no U.S. company is
prepared to walk away from the Chinese market, particularly given the pressures from
shareholders for short-term returns. Our companies have to make returns this quarter; Chinese
firms sometime in the next quarter century. In addition, because of the competitive rivalries
between U.S. technology firms, firms often look at aggressive Chinese actions taken against their
U.S. counterparts as serving their own strategic interests (at least in the short term).
What Should the U.S. Government Do?
The first step for any long-term response on the part of the U.S. government to this harassment
of U.S. companies is to realize that this is now a core part of the Chinese government strategy
and it will not change unless the Chinese government realizes that the strategy has costs. This is
not principally about us being patient while the Chinese government realizes the error of their
ways. It is about making it clear to them that this kind of behavior is unacceptable. This means
realizing that America is in a trade war and a long-term fight for leading the global technology
industry—a war we could very well lose unless we escalate our response. Fighting back has
risks, but so does appeasement: the significant weakening of U.S. competitiveness and lost jobs.
The Chinese have shown that they will respond to pressure, but only if it's serious and done in
concert with our allies.
The first key step will be for the administration to make fighting this high-tech harassment a
higher foreign affairs priority than issues like climate change, human rights, or North Korea. For
18 U.S. Bureau of Industry and Security, “Technology Transfer to China,” (overview, U.S. Department of
Commerce, Washington, D.C.: 1999), http://www.bis.doc.gov/defenseindustrialbaseprograms/osies/
defmarketresearchrpts/techtransfer2prc.html#techtransferprcpoliciesprocesses
62
the Chinese government has learned that it can take these steps largely with impunity, suffering
only criticisms from U.S. government officials at forums like the S&ED.
The second step will be changing how the U.S. government fundamentally thinks about and acts
on trade enforcement. Congress should pass legislation creating within the Office of the U.S.
Trade Representative (USTR) a Chief Trade Enforcement Officer and a Trade Enforcement
Working Group, institutionalizing within USTR the function of trade enforcement, making it
clear that at least one portion of USTR is expected to play the role of the bad cop. In addition,
those agencies devoted to engaging with foreign nations on diplomatic, security, and financial
concerns (such as the Departments of State, Judiciary and Treasury) should be relegated to an
advisory capacity in the interagency trade process. Too often agencies like the Departments of
Treasury, Justice, and State veto strong action against China either out of ignorance of what their
real end game is or out a desire to not rock the boat. Enforcement should be left to those agencies
that are equipped to do it best and have the largest stake in a strong and globally competitive
U.S. economy, in particular, the Department of Commerce and USTR.
Equally important are additional resources for enforcement. In USTR’s defense, bringing trade
enforcement actions is time consuming and expensive. For the year 2015, the Obama
Administration requested $56 million for USTR, but both the House and Senate proposed
underfunding that by between $1 million and $2.5 million. Not only is that far below what is
needed for trade enforcement, but it reflects the mistaken belief that our economic
competitiveness does not need to be protected. In fact, Congress should increase the USTR
budget by around $30 million to fulfill the need for this new Chief Trade Enforcement Officer
and an associated Working Group staff of around 50 to 100.
USTR also needs to become more assertive in bringing enforcement cases against China.
Companies are often reluctant to initiate complaints because they know that they will face
retribution from the Chinese government. The U.S. government should address this conundrum
by making it national policy for USTR to bring cases whenever U.S. interests are being hurt,
even if U.S. companies don’t want them to proceed.
The U.S. government also needs a national trade enforcement strategy that gives guidance to
agencies, including the Department of Commerce and USTR, but also others, on what the
enforcement priorities should be. Trade enforcement is reactive, treating “potato chips” the same
as “computer chips.” While there are strong political pressures on USTR to treat agricultural and
commodity-based cases the same as high-tech one when it comes to trade enforcement, the
reality is that the damage to the U.S. economy from losing tech-based output is significantly
larger than losing commodity-based output.
The United States also needs to better empower multinational companies with tools to better
resist forced technology transfer. As discussed above, one key part of China’s mercantilist
strategy is to tie market access to technology transfer. Foreign companies often agree to it
because they don’t really have a choice; they either give up their technology or their access to the
world’s fastest growing market, and in the process lose out to competitors who are willing to
make the essentially Hobson’s choice. Industrial organization economists refer to a market like
this as monopsonistic: where one buyer can largely set whatever terms it wants to competitive
sellers. To address this, Congress should pass legislation that allows firms to ask the
Department of Justice for an exemption to coordinate actions regarding technology transfer and
63
investment to other nations. For example, if companies in a similar industry can agree that none
of them will transfer technology to China in order to gain market access then the Chinese
government will have much less leverage over them. The same would be true if companies
agreed that they would not invest in China until China improved its intellectual property
protections. This could be modeled in part on the 1984 National Cooperative Research Act,
which led to an explosion of consortium-based research activity by removing a defect of antitrust
law which suggested that collaborative joint research efforts among corporations were
potentially collusive. For those who worry that extending this kind of cooperative tool to foreign
tech transfer would somehow be anti-consumer, it’s important to note that this would not apply
to pricing issues, but only to tech transfer issues where companies could point to coercive action
in foreign markets.
Congress also needs to ensure any future bilateral trade and investment treaty with China contain
strong and enforceable provisions against forced technology and R&D transfer. In 2010, Premier
Wen Jiabao announced, “We will … enable foreign businesses to get national treatment like their
Chinese counterparts.” Yet, China’s system of investment screening is discriminatory, and would
constitute a denial of national treatment under U.S. investment treaties and free trade agreements.
China bound certain rights of establishment when joining the WTO, namely those for which it
scheduled commitments under the General Agreement on Trade in Services (GATS). In the
WTO Doha Development Round, a key sticking point has been Chinese unwillingness to expand
its GATS commitments. Thus, Chinese statements that it gives non-discriminatory treatment to
foreign businesses are not accurate. The Office of the United States Trade Representative is
negotiating a Bilateral Investment Treaty (BIT) with China. It is not clear that this treaty will
contain the provisions needed to actually end pressured technology transfer. Congress should
make it clear to USTR and the administration that no treaty is given preference to a treaty that
does not firmly stop this practice. Congress should also make it clear that it will not judge any
administration by whether a BIT with China is concluded, but rather by if the United States made
a strong effort to conclude a treaty that provided full protection against mercantilist practices like
forced transfer of R&D. Without this assurance, administrations will feel pressure to sign
agreements just for the sake of signing agreements and being able to “check the box.” technology
transfer.
Finally, Congress needs to take steps to reform the way in which the national security system
collects information. However, the reforms discussed by the Obama administration to date do not
go far enough to establish the types of structural reforms needed to protect the economic interests
of the United States. Specifically, Congress should clearly and unequivocally state that the policy
of the U.S. government is to strengthen, not weaken, cyber security and renounce the practice of
having intelligence agencies work to introduce backdoors and other vulnerabilities into
commercial products. In addition, the President should work with other countries to establish
common rules on when intelligence communities can access foreign data so as to promote zones
of free trade in digital goods and services. Such a change in policy will not necessarily change
Chinese high-tech harassment in the short term, but it will enable the United States government
to more effectively challenge their rationales for it.
In summary, it's not too late to protect global innovation and U.S. from these unfair attacks from
China. But absent concerted action soon, we will have to live with the long-term negative
consequences on the U.S. economy and national security capabilities.
64
Figure 1: Chinese Technology Standards19
19 National Science Foundation, Science and Engineering Indicators: 2014 (Appendix Table 6-25: Exports and
imports of ICT products, by region/country/economy: selected years, 1997-2012),
http://www.nsf.gov/statistics/seind14/content/appendix/at.pdf
65
OPENING STATEMENT OF DAN HARRIS
FOUNDER/PARTNER, HARRIS MOURE
MR. HARRIS: Oh, thank you.
I was int roduced as an expert , and I 'd l ike to qual i fy that by saying I
do not th ink of mysel f as an expert . I am just a private pract ice lawyer who
represents American and Aust ral ian companies and some European and
Canadian companies as wel l in China .
I 'm going to tel l you a l i t t l e bi t about what we do so you can get a
l i t t l e bi t bet ter perspect ive of where I 'm coming f rom on this . The bulk of
my cl ien ts ' f i rms are smal l and medium -size bus inesses , most ly American
businesses , but some European and Aus tra l ian and Canadian businesses as
wel l . Most of them have revenues between 100 mil l ion and a bi l l ion a year .
Our cl ients are most ly tech companies , manufacturing companies and
service businesses .
About 20 percent of our work i s for companies in the movie and
entertainment indus try. We have some c l ients in highly -regula ted
indust r ies , l ike heal th care , senior care , banking, insurance , f inance,
telecom and mining, but those companies make up less than ten percent of
our cl ien t base .
Most of the China work we do for our cl ien ts is relat ively rout ine. We
help them regis ter as companies in China. We regis ter thei r t rademarks and
copyr ights in China. We draft thei r contracts wi th Chinese companies . We
help them with thei r employment , tax and cus toms mat ters . We oversee
their l i t igat ion in China, and we represent them in arbi t rat ions in China.
We help them buy Chinese companies .
For our c l ients , the big ant i - fore ign issue is whether they wil l be
al lowed to conduct business at al l in China as that is certai nly not always a
given . Certain industr ies in China are shut off or l imited to foreign
businesses ac t ing alone. For our cl ients , publ ishing and movies are most
prominent .
Essent ial l y anything that might al low for nongovernmental
communicat ion to or betw een Chinese c i t izens is problemat ic, but i t i s not
clear to me that these l imi ta t ions are in tended to be an t i -foreign, a s China
does not real ly want any private ent i t ies , foreign or Chinese , engaging in
these act iv i t i es wi thout s t r ict governmenta l oversigh t .
So do these l imits against fore ign companies ar ise f rom ant i - foreign
bias or just the Chinese government 's bel ief that i t can bet ter cont rol
Chinese companies? To our cl ients , tha t di s t inct ion doesn ' t mat ter .
On day- to-day legal mat ters , our c l ien ts are almost invar iab ly t reated
pursuant to law, and so long as they abide by the law, they seldom have any
problems. The problem for our cl ien ts i sn ' t so much how the Chinese
government t reats them; i t ' s how they a re t rea ted as compared to thei r
Chinese compet i tors who are less l ikely to abide by the laws and more
l ikely to get away with i t .
I have no s tat is t i cs on this . I doubt there are any s tat is t i cs on this , but
66
I see i t and I hear i t al l the t ime. I see i t when one of our c l ients buys a
Chinese business that has hal f of i ts employees off the grid and has
fac i l i t i es tha t are not even c lose to being in compliance with use laws, and I
know foreign companies cannot get away with that .
And I hear i t f rom Chinese employees of our c l ients who insis t tha t
there is no need for our cl ien ts to fol low various laws. They insis t there i s
no need to fo l low various laws and to do so i s s tupid. Is th is d ispari t y due
to ant i - foreign bias or is i t due to corrupt ion? Again, for our c l ients , the
answer i s i r relevan t .
Thank you.
67
PREPARED STATEMENT OF DAN HARRIS
FOUNDER/PARTNER, HARRIS MOURE
January 28, 2015 Dan Harris
Harris and Moure PLLC
Testimony before the US-‐China Economic and Security Review Commission
Hearing on the Foreign Investment Climate in China
I. China’s Treatment of Foreign-‐invested Firms1 in 2014
2014 was a challenging year for foreign business in China. Across many industries, foreign
companies reported a rise in legal and administrative investigations, and increased
administrative difficulties with normally routine matters such as taxes, visas and customs.
For larger companies, a rise in enforcement of China’s Anti-‐monopoly Law (“AML”)
introduced new elements of risk for local operations and added complications for global M&A.
This increase in legal and administrative enforcement actions has led many in the foreign
business community to conclude that business in China is becoming more difficult,2 with
some even suggesting that “multinational companies are under selective and subjective
enforcement by Chinese government agencies.”3
Given this concern, it is fitting that the Commission has called this hearing to address the
overall business environment for foreign firms. It is my hope that our efforts today will
contribute to a better understanding of the changing business environment facing foreign
firms in China.
Though concerns have been raised about a rise in discriminatory conduct against foreign
businesses, my own view is that the dominant trend in 2014 was that of increased enforcement
nationwide, equally affecting both domestic and foreign companies. One of the lessons I’ve
learned from handling China legal matters over the last decade is that a good part of my law
firm clients’ claims of anti-‐foreign bias often stem from a misunderstanding of China and its
laws rather than actual discriminatory action.
In suggesting this trend, I am not turning a blind eye to the reality that foreign firms are not
always treated fairly in China, nor am I ignoring the fact that foreign-‐bias may have played a
role in certain investigative decisions, such as AML.4 Rather, I suggest we view the current
foreign business climate as being shaped by two interrelated factors:
First, a long-‐term trend whereby the Chinese government seeks to attract
1 “Foreign,” in this report, refers to any company established in China with any amount of foreign-‐investment.
2 A recent survey by the American Chamber of Commerce in China found that 60% of member companies
reported feeling less welcome in China then before -‐-‐ a 20% rise over 2013. 49% of companies reported that
they felt foreign firms were being singled out unfairly by the Chinese government. See American Chamber of
Commerce in China, Challenges and Opportunities in China’s Investment Environment 2014, available at:
http://www.amchamchina.org/wp-‐investment2014. 3 Id. 4 See Section IV.B.
68
and condition foreign investment in order to advance its own national
economic and industrial policy goals.
Second, a more recent trend whereby the Chinese government is enacting
substantial administrative reforms, one effect of which is an increase in
administrative enforcement.
In the remainder of this section, I will address this second, more recent, trend. In Section II, I
will cover the first trend, i.e., the mechanisms China uses to condition foreign investment to
ensure it contributes to China’s own national economic and industrial policy goals.
A. Administrative Enforcement Activity against Foreign Business in 2014
In 2014, the foreign business community in China witnessed a number of government actions
seen as negatively affecting the foreign business climate:
A notable increase in China’s enforcement of its AML, including:
o Combined fines of $46 million against Volkswagen and Chrysler, and nearly
$200 million in fines against 12 Japanese auto-‐parts manufactures in separate
price-‐fixing investigations;
o Numerous investigations into domestic pharmaceutical manufacturers;
o Blockage of a planned global shipping alliance between Moller-‐Maersk, CMA
CGM, and MSC Mediterranean; and
o Ongoing investigations into the local business practices of Microsoft and
Qualcomm.
Multiple anti-‐corruption investigations against foreign pharmaceutical companies,
including a
$500 million bribery fine levied against British Pharmaceutical company
GlaxoSmithKline.
Numerous campaigns in China’s state-‐run media targeting, among others,
KFC, Apple, and McDonalds for alleged consumer rights violations.
A domestic backlash against foreign information technology providers and calls for
eliminating foreign technology in key sectors by 2020.
From my law firm’s own clients, we have also seen greatly increased enforcement on
all sorts of relatively routine business matters such as customs duties, employee
layoffs, visa checks, and tax payments.
In several of these cases, we should recognize that there appears to have been concrete evidence
of wrongdoing sufficient to justify a government response. But looking at some of the more
69
borderline cases -‐-‐ the more routine administrative difficulties -‐-‐ it is difficult to ascertain
whether this rise in enforcement has been motivated by anti-‐foreign bias or driven by some
other factor. One effect of China’s general lack of legal transparency is an inability to precisely
determine the driving factors behind government action. And from the foreign perspective,
there is often a tendency to view any adverse action as some form of “bias,” when really it just
may be how things are done (or being done) in China. In the present case, the recent rise of
administrative and legal enforcement actions against domestic companies suggests that more
than just simple anti-‐foreign bias is motivating this recent enforcement.
B. Administrative Enforcement Activity Against Domestic Business in 2014
When viewed in isolation, it seems perfectly reasonable to conclude that some amount of
selective enforcement is motivating the increase in administrative and legal enforcement
actions against foreign companies. However, looking at the past year for domestic businesses
we see many of the same pressures:
Politically, President Xi Jinping is spearheading a large, possibly unprecedented,
anti-‐corruption campaign targeting Communist Party officials at all levels,
including those in the management ranks of state-‐owned enterprises. Seeking
out the “tigers and flies” of official corruption, this campaign has resulted in
administrative raids of thousands of domestic businesses suspected of bribery
violations involving corrupt officials. Though these investigations have also
ensnared some foreign companies, the numbers affected and business
disruption caused pale in comparison to domestic firms.
Although there are important questions to be asked regarding China’s
application of the AML against foreign companies, we must also recognize that
Chinese authorities have not been reluctant to carry out AML investigations
against its own domestic companies. According to NDRC statistics, AML
enforcement agencies have carried out investigations against 339 companies
since the promulgation of the AML in 2008, of which only 33 were foreign
companies.5 Generally, these investigations fail to garner the type of Western
press coverage that follows actions against foreign companies, even though the
damage awards are similar. For instance, over the last two years we have seen
the following major fines levied against domestic companies for price fixing:6
$107 million against milk powder manufacturer Wuliangye;
$18.6 million against three domestic cement manufacturers;
$73.5 million against two Chinese liquor producers; and
5 See 中国反垄断法实施 6 年多 查处 339 家机构 外企仅 33 家 [“In the 6 Years since China’s AML has been
implemented, 339 organizations have been investigated, 33 foreign”], China News Web, Dec. 6, 2014, available
at: http://finance.chinanews.com/cj/2014/12-‐06/6851996.shtml. 6 Industry observers speculate that one of the main motivations behind the recent increase in AML investigations is
the possible belief of China’s National Reform and Development Commission that AML is the best tool available to
reduce prices on citizen’s daily goods.
70
$18 million against 23 auto-‐insurers.
Chinese tax authorities have also launched twin campaigns to more strictly
enforce tax laws relating to personal foreign income and to curb tax
evasion by Chinese companies operating abroad.7
If the rise in administrative enforcement actions against foreign companies was to enhance
domestic competitiveness, as some suggest, then it seems unlikely that China’s administrative,
party and judicial authorities would carry out equivalent, and perhaps more intrusive,
investigations into their own domestic companies. That we’re seen a similar increase in
administrative enforcement actions against domestic companies suggests that larger elements
are at play.
C. Potential Drivers of China’s Increased Administrative Enforcement
Though we cannot know with certainty what exactly is behind China’s rise in administrative
enforcement, it is apparent that this increase coincided with Xi Jinping’s rise to power and is
due in some part to his ongoing anti-‐corruption and economic reforms. In particular, two
major administrative reforms seem to be supporting this new role for Chinese administrative
and judicial authorities.
First, Xi’s plans for China’s economic reform codified at the Third Plenum in November 2013
included a call for the “market to play a decisive role in allocating resources.” As part of this
greater market opening, a series of administrative reforms have been promulgated aiming to
simplify China’s investment approvals process by reducing government oversight at the initial
investment approval stage. According to one of our clients, these reforms are requiring
regulators to shift their resources away from their traditional role as industry gatekeeper. In a
bid to find a new role for these resources, these regulators are now increasing their domestic
supervision and enforcement efforts.
A second complementary factor is Xi Jinping’s emphasis on governing the country according
to the rule of law.8 Highlighted in the Third Plenum Communique but made the singular
focus of the recent Fourth Plenum, Xi’s rule of law reforms are aimed at creating a stronger
and more professional judicial corps, while also increasing the transparency of judicial
decisions. China’s state-‐run media outlets have further highlighted the “rule of law” as an
essential component of Xi’s ongoing corruption campaign and as a necessary basis for
advancing his economic reforms. As Chinese regulators are often motivated and assessed by
their ability to hew to Party dictates, it could be that this increased emphasis on rule of law –
in tandem with the administrative reforms described above – may be leading to increased
7 See, e.g., China Starts Enforcing Tax Law for Chinese Citizens Working Abroad, New York Times, Jan 7, 2015,
available at: http://mobile.nytimes.com/2015/01/08/business/international/china-‐starts-‐enforcing-‐tax-‐law-‐ for-‐
citizens-‐working-‐abroad.html. 8 Some translators have offered the phrase “rule by law.” Whichever the case, party documents indicate that the rule
of law (or rule by law) should “be advanced under CPC leadership,” indicating the continued primacy of the Party in
China’s administrative hierarchy, and suggesting that rule of law may not provide an independent check on Party
power.
71
enforcement activity by China’s administrative and judicial actors.
These two political developments appear to be the main drivers behind this recent trend of
increased administrative enforcement activity, and may help explain why foreign companies
have seen business conditions deteriorate over the last 12-‐24 months.
II. Legal and Regulatory Obstacles Facing Foreign Companies in China
As noted in the previous section, the foreign business climate in China is currently being
shaped by two interrelated trends: a short-‐term trend of increased administrative enforcement,
equally applied against both foreign and domestic companies, and a longer-‐term trend of
conditioning foreign investment in line with China’s national policy goals.
In this section, I will describe the second of these trends, which I view as primarily
responsible for many of the legal and regulatory obstacles currently facing foreign companies
in China. To do so, I will rely heavily on a recent study prepared by the law firm Covington
& Burling for the European Commission Directorate-‐General for Trade (the “EC Report”).9
Prepared to help EU and US trade officials prepare to negotiate bilateral investment treaties
and other trade agreements with China, the EC Report identifies two mechanisms – legal
restraints and extra-‐legal administrative practices – that may act to “restrain” foreign
investors and investment in China.10
A. Legal Restraints
The EC Report uses the term “Legal restraints” to refer to those codified legal measures that
have the potential to discriminate against foreign business, either by favoring domestic
investors or investments over foreign investors or investments, or by favoring state-‐owned
investors or investments over privately-‐owned investors or investments.
The report identifies three broad categories of legal restraints affecting foreign business in
China:
1. Pre-‐establishment restraints, such as “discriminatory local partner/equity
requirements, market entry restrictions [e.g., minimum-‐amounts of foreign
equity or administrative licensing restrictions], approval process restraints, and
technology transfer measures”;
2. Post-‐establishment restraints, such as “differentiated treatment through
targeted enforcement, government financial support, and government
procurement”; and,
9 See Covington and Burling LLP, Measures and Practices Restraining Foreign Investment in China, available at:
http://trade.ec.europa.eu/doclib/docs/2014/august/tradoc_152739.08.10.pdf. 10 The study defines “restraint” as any mechanism “that … can result in more favorable treatment for at least one
domestic investor or investment than is available generally for foreign investors or investments.”
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3. “Broad policy statements that potentially result in less favorable treatment for
foreign investors and investments during both the pre-‐establishment and post-
‐establishing stages.”
Historically, legal restraints have been one of the more common mechanisms by which China
has sought to shape or direct foreign investment over the last several decades.11 However,
because legal restraints are codified in existing laws, they are easily appealable before
international trading bodies, making them less effective over time as China becomes more
fully immersed in international trading regimes. As a result, the current trend in China is away
from the use of black-‐and-‐white legal restraints in favor of administrative practices.
B. Administrative Practices
Administrative practices are defined in the EC Report to include “the practices of agencies
and officials in all branches and at all levels of government, including those engaged in
legislative and judicial as well as executive functions.” The EC Report then uses the term
“administrative restraints” to refer to “those administrative practices sometimes used to
restrain, condition or otherwise frame foreign investment, including especially those practices
that are not explicitly authorized or compelled by published rules.”12 In some cases,
administrative practices may actually conflict with the written law, such as where the
government places an additional extra-‐legal requirement on a foreign investment project. For
instance, where a required license is conditioned on the foreign investor entering into a joint
venture with a local partner where no such joint venture requirement is found in the law.
Based on extensive research and discussions with industry, the EC report identifies 21
administrative practices falling into four broad categories:
1. Rule-‐Making (4);
2. Administrative approvals (6);
3. Standards setting (3); and
4. Judicial processes and enforcement (8).
These practices include such matters as verbal instructions (“Oral instructions received by
administrative authorities may go beyond what is required in law”) or issues concerning
11 The EC Report notes that legal restraints are primarily used to promote domestic national champions, encourage or
protect strategic industries, and promote export or foster indigenous innovation. Local governments may also
employ legal restraints to promote their own local industries or to enhance local tax revenues or employment.
12 The EC Report seems to mainly rely on the term “administrative practice” to refer to both the administrative
practice itself as well as the administrative restraint it causes. This usage is followed here.
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legislative transparency (“Foreign attorneys have limited access to legal hearings and other
proceedings.”). At their heart, they involve systemic processes, omissions or instructions that
restrain foreign investment in China, but which are difficult for foreign companies to appeal
because they are not formally codified and are often applied by government agencies on an
ad hoc basis.
According to the EC Report, “foreign investors in China generally believe that these
administrative practices match or even trump published rules as a source of
investment restraints, (emphasis added) because of three characteristics of China’s
administrative system:”
1. “Reliance on industrial policies explicitly designed to support the
development of domestic industries and creation of domestic
champions;
2. The pivotal role of relatively opaque inbound FDI approval processes led
by officials explicitly mandated to help China achieve its industrial policy
goals; and
3. The lack of effective recourse if aspiring foreign investors believe that the
approval authorities have not complied with WTO commitments or China’s
own regulations.”
4. These three characteristics demonstrate the core components of China’s long-‐term trend of conditioning foreign investment in support of national policy
goals, and represent some of the core legal and regulatory obstacles facing
foreign business in China.
Finally, it should be noted that while we know Chinese officials use administrative practices,
we do not know many of the details surrounding their use: how frequently they are applied,
what they normally entail, or which industries are most often targeted. As one can imagine,
foreign companies are generally reluctant to report the use of administrative practices by
Chinese authorities, in part for fear of government backlash from these same authorities. As a
result, additional research is needed to quantify their total impact. In Section V, I will propose
one such mechanism to achieve this goal.
III. China’s Legal Transparency and Its Affect on Foreign Companies
Although China has made great strides in developing a rule of law over the last thirty years, an
ongoing lack of legal transparency continues to create compliance and regulatory obstacles for
foreign business in China.
In the EC report, many of the most commonly reported administrative practices relate to legal
transparency:
“Regulatory ambiguity allow[ing] regulators to interpret laws in ways
74
that advantage local companies or impose special conditions on foreign
companies;”
“Local discretion in deciding whether to enforce PRC laws;”
“[Limited access of foreign attorneys] to legal hearings and other proceedings;”
“Legal measures or court decisions not always made public;” and
“…[A] lack of judicial independence.”
Of these issues, “regulatory ambiguity” is far and away the most commonly reported
administrative practice. Here, the issue is that many of China’s promulgated laws and
regulations contain ambiguous or general language, and often lack definitions for key terms.
The resulting lack of precision creates uncertainty for local businesses, whose legal
compliance efforts must then be structured around these vague and ambiguous legal
requirements.13 These difficulties are further exacerbated by the fact that Chinese court
decisions are not regularly published, or, if published, often fail to include detailed legal
reasoning. This prevents companies from understanding how a particular law or provision
within a law has been interpreted or applied in practice.
As a result of this legal ambiguity, Chinese regulators are afforded a great deal of discretion to
choose whether or how to interpret a law in response to a given activity. This provides a
mechanism for political interests to affect legal interpretation, and contributes to the use of
administrative practices discussed in Section II.B.
IV. China’s Treatment of Foreign Companies by Sector
A. Indigenous Innovation and the Strategic Emerging Industries
China’s treatment of foreign companies is determined in large part by the country’s economic
and industrial policies goals. To further its economic development, China seeks to attract
foreign investment, technology and expertise in the “Strategic Emerging Industries” to further
their own development of national champions in these industries.
This Commission is well aware of these programs, having previously addressed them in a 2011
hearing entitled “China’s Five-‐Year Plan, Indigenous Innovation and Technology Transfers
and Outsourcing.”
In that Hearing, the hearing co-‐chair summarized these industrial policy goals:
13 Some have argued that China’s ambiguous legal drafting is a positive feature, providing flexibility for China’s
regulators to interpret laws in line with actual circumstances and apply domestic laws fairly across a diverse national
environment taking into account specific local conditions.
75
In its newly-‐adopted 12th Five-‐Year Plan China makes clear that it hopes to
move up the manufacturing value chain by making explicit mention of Strategic
Emerging Industries, which the Chinese government would like to see
dominated by Chinese firms. These industries are: New-‐ generation information
technology, high-‐end equipment manufacturing, advanced materials,
alternative-‐fuel cars, energy conservation and environmental protection,
alternative energy, and biotechnology. China’s goal is to take the Strategic
Emerging Industries from a current combined share of 3% of Chinese GDP to
8% by 2015 and 15% by 2020.
One of the tools the Chinese government will use to grow these Strategic
Emerging Industries is indigenous innovation. This policy seeks to help China
move up the value-‐added chain. Indigenous innovation policies have drawn
criticism from the U.S. and European business communities and policy makers
because China uses this policy to require foreign companies to transfer their
higher technologies and know-‐how as a condition of doing business in China or
getting government procurement contracts in China.14
Given these official policies, foreign companies investing in these industries are likely to
attract greater government scrutiny from Chinese officials. This enhanced administrative
scrutiny is not always negative. In many cases, China has shown a great willingness to attract
foreign investment in identified industries, providing tax breaks, streamlined administrative
approvals and other incentives designed to spur investment. Indeed, when Western parties
claim discriminatory treatment, one of the standard responses from Chinese media
commentators is to point out these incentives and claim that it is, in fact, domestic companies
that face the real discrimination, since they do not receive the same incentives provided to
foreign companies.
For example, after several industry groups released statements calling attention to China’s
possible selective targeting of foreign companies in AML investigations, the state-‐run
newspaper Global Times included comments from a Beijing-‐based economist -‐-‐ Wang Jun
of the China Center for International Economic Exchange – stating that “recent antitrust
investigations have not been targeting foreign businesses” and “in fact, in the last three
decades, these overseas firms have actually been giving preferential treatment in areas such as
taxation.”15
Nevertheless, there remains a fear that when targeted industries have reached a certain point of
domestic maturity, this formally positive treatment will shift to gradually increasing
administrative interference so as to promote the long term growth prospects of Chinese firms.
And there are some who feel that China’s recent AML investigations may be following this path.
14 See Prepared Statement of Commissioner Patrick A. Mulloy Hearing Co-‐Chair, available at:
http://origin.www.uscc.gov/sites/default/files/transcripts/6.15.11HearingTranscript.pdf
15 See Foreign Firms Not Being Singled out in Antitrust Campaign: Officials, Global Times, Dec. 8, 2014 available
at:
http://www.globaltimes.cn/content/895645.shtml.
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B. Recent Actions against Foreign Automobile, Pharmaceuticals, and Technology
As noted prior, one of the key factors driving recent AML activity is the newly emboldened
NDRC and its apparent belief that the AML is the best tool for reducing prices. This
argument is supported by the numerous AML actions affecting both domestic and foreign
manufacturers of consumer goods that have occurred over the last two years.
One other potential driver is the belief among certain Western observers that the AML is
being applied in areas where industrial policies have failed in China. According to an analysis
of recent AML actions by The Conference Board:
“One consistent theme across AML investigations to date – in sectors as
diverse as pharmaceuticals, baby formula, IT technology, and automobiles – is
that the imposed remedies require both substantial price reductions as well as
the abandonment of contractual controls that enable owners of brands and
other IP to leverage those assets across their supply chains to maximum full
value in the Chinese market. The fact that the investigations disregard market
share and market power as the critical transgression makes it clear that this is
about curbing the industry-‐wide power of foreign investors, and not about
addressing monopoly abuses per se.”16
The analysis then suggests that these investigations are focused on disrupting “what the NDRC
calls ‘vertical monopolies’ – i.e., the power brand and IP owners have to control costs and
pricing across their supply chains and, in doing so, maximize their own margins.”
If substantiated, this type of AML application raises obvious concerns for foreign business.
Although my testimony today has largely focused on the trend of increased enforcement,
impartially applied, I must also make clear that I believe there are valid questions and
concerns to be raised regarding the Chinese government’s use of AML actions against foreign
companies. With that in mind, one aspect of China’s recent AML investigations we may wish
to keep in mind is that the Chinese companies most at risk of an
AML action based on pricing power will generally be China’s biggest and most powerful
companies, and will frequently by state-‐owned. Because of obvious reasons, these are the
same companies the Chinese authorities are likely least willing to confront. This asymmetry
between large foreign and Chinese companies could be one reason that foreign companies
will be more likely to come under AML scrutiny than Chinese companies.
C. Protecting the Interests of Foreign Companies
At present, foreign investors affected by the use of administrative practices or China’s
selective enforcement of its AML have little potential recourse to protect their interests. In a
16 See The Conference Board. China Center Quick Note: The AML Background – Looking Behind and Beyond the
Current Regulatory Salvo, available at: https://www.conference-‐
board.org/publications/publicationdetail.cfm?publicationid=2880.
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2013 report on China’s investment approval process, the US Chamber of Commerce noted
four factors that discourage foreign investors from using China’s official appeals mechanism:
“Very broadly defined grounds for denying investment applications and
lack of an explicit affirmative duty for approval authorities to approve
applications submitted to them if the applications meet clearly specific
criteria;
Difficulty in providing solid evidence of inappropriate conduct, since
approval authorities generally rely on oral communications to convey
specific conditions of approval, and such communications are often
relayed indirectly through a Chinese joint venture partner.
The fact that decisions of approval authorities and the People’s Courts are
all subject to Party supervision and are expected to align with the same
underlying policies of the Party; and
The reality that potential investors are extremely reluctant to challenge
the decisions of approval authorities, who have considerable power to
affect companies’ future business prospects in China.”17
Given these factors discouraging formal appeal, foreign companies must often accept an
extralegal administrative practice in exchange for Chinese market access. In light of this
reality, one option worth considering is the creation of an online reporting platform allowing
foreign companies to aggregate data from their experience in order to better understand,
analyze and quantify extralegal behaviors carried out by Chinese officials. Such a tool could
permit a company to report the type of administrative practice encountered (e.g., a request for
technology transfer in exchange for a license), and record other pertinent data such as the date,
location, and identity of the requesting government agency.
The Indian website “I Paid a Bribe” is one example of this type of tool. With “I Paid a
Bribe,” the problem faced by Indian citizens was very similar to the one currently facing
foreign business in China –-‐ how to report potentially illegal or corrupt government
conduct without incurring government retribution. By harnessing the power of the
social web, “I Paid a Bribe” has now accumulated over 35,000 total reports, including
not only instances of bribery requests, but also reports of “honest officials” and “bribe
fighters.” It has since been replicated in other countries, including Pakistan, Kenya and
Bhutan, although sadly, efforts to implement similar systems from within China have
run afoul of government censors.18
17 See U.S. Chamber of Commerce, China’s Approval Process for Inbound Foreign Direct Investment: Impact on
Market Access, National Treatment, and Transparency (2013), available at:
https://www.uschamber.com/sites/default/files/legacy/reports/020021_China_InvestmentPaper_hires.pdf
18 See Web Sites Shine Light on Petty Bribery Worldwide, New York Times, Mar. 7, 2012, available
at: http://www.nytimes.com/2012/03/07/business/web-‐sites-‐shine-‐light-‐on-‐petty-‐bribery-‐
worldwide.html?pagewanted=all&_r=0
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By establishing a similar website overseas, foreign companies would have a mechanism to
report extralegal conduct as well as instances of honest officialdom without the potential for
government retribution. This dataset would not only help China’s efforts to institute a rule of
law within China and stamp out corruption, but it would also provide a searchable dataset for
foreign companies looking to invest or expand in China, permitting them to choose those
localities and provinces that are most receptive to foreign investment.
Of course, design of such a system would need to confront such questions as veracity and
access (for instance whether to make the platform closed to qualified individuals within
designated companies or open to the public), and additional input from industry participants
would be needed to assess their needs. Nevertheless such an approach would bring some
degree of light and transparency into what is now a very opaque market environment.
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PANEL I QUESTION AND ANSWER
HEARING CO-CHAIR SLANE: Mr. Moure. Mr. Harri s . I 'm sorry.
HEARING CO-CHAIR SLANE: Thank you.
Commissioner Wessel .
COMMISSIONER WESSEL: Thank you both for being here, and, Rob,
congratulat ions to you and your organizat ion for i ts recent ly being noted, I
bel ieve, as one of the top th ink tanks by an Augus t publ icat ion. That ’s
something we knew here f rom our interact ions with you , but now has been
recognized. So congratulat ions.
I 'm reminded f rom this panel and the previous panel of an o ld Peanuts
car toon, which probably was repeated many t imes, where Lucy is holding
the footbal l and t rying to convince Char l ie Brown to come running at fu l l
speed and kick i t , and she ' l l hold i t . So we do S&ED. We do JCCT, and we
have a discussion. Our off icial s l eave and say, you know, we 're on the
r ight path . The path doesn ' t change: r i s ing t rade defici ts ; U.S . companies
that are losing IP, losing opportuni t ies ; et ce tera, et cetera .
We're now engaged in a BIT negot ia t ion , and I bel ieve we 're in the
18th round, as I recal l , a l though not a lot of progress unt i l the negat ive l is t
comes out shor t ly th is year .
I t seems to me that wi th al l that we know and what we 've heard today,
tha t a BIT i s actual ly the worst thing we could do r ight now. By ra t i fying
China 's approach, by bas ical ly giving a Good Housekeeping Seal of
Approval to U.S. compani es to expand investment in China , as wel l as - -not
tha t we don ' t al ready cover Chinese companies operat ing here under the
rule of l aw, but a l i t t le greater confidence, I think , because their
government i s worried about pol i t i cizat ion with, you know, a numbe r of
cases that have come in the past .
It seems to me we shouldn ' t be pursu ing the same approach that we 've
been pursuing so long. I 'm not - -and I bel ieve i t was said earl ier - - I 'm not
saying we shouldn 't engage, but we should expect resul ts , and we should
s top offering benefi ts and expect ing resul ts di f ferent than we have in the
past .
Shouldn ' t we change what we 're doing? To both panel is ts .
DR. ATKINSON: I absolutely agree we should change what we 're
doing. Simply going to Bei j ing or having the Chinese government come
here and having a couple days of meet ings and having some commitments ,
i t 's helpful . I mean don 't get me wrong. There are certain areas - - I 've seen
that - -where i f the pressure is sustained enough, broad enough, and focused
enough, Chinese wil l back down. The problem is i t ' s seldom that ' s the case.
Or when they back down, i f they back down, a l i t t l e bi t . We see that ,
for example, in the HNTE, the High and New Technology Enterpri se, R&D
credi t , which is di scriminatory against U.S . enterpri s es and t r ies to take
their IP along wi th i t , and Chinese are making, I bel ieve , modest , modes t
adjustments to i t bu t aren ' t f ix ing i t .
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So I think, as I sa id before , your point about a BIT is a good one. I
think ul t imately we should have a BIT with China, and i t should be
incredibly s t rong, but i t does send a message that we essent ial l y are saying
to the Chinese, we bel ieve what you 're doing is okay r ight now, and we ' l l
jus t negot iate with you, and I don 't think that ' s the r ight message. The
message we should say to them is you real ly are not behaving in an
appropriate way as a member of the WTO, and unt i l you s tar t to make rea l
substant ive changes that we can document , that have resul ts , we ' re going to
a fundamenta l ly di f ferent approach with you.
Now, ex act ly what that looks l ike, I don ' t have the answer to , but I do
think one of the f i rs t s teps - - I think a commissioner earl ier t alked about the
t rade def ic i t be ing an important indicator - - I agree with that . But we 've got
to go beyond that because I could s ee fundamental ly the Chinese get t ing to
a model where they import a lo t of our beef and our corn, and the t rade
defici t goes down, but they' re export ing high -tech products and, you know,
potato chips , computer ch ips , they' re not the same.
COMMISSIONER WESSEL: I know i t needs to be the composi t ion.
DR. ATKINSON: It needs to be the composi t ion.
COMMISSIONER WESSEL: Yes .
DR. ATKINSON: So I go back to this . The U.S. government should
have a pol icy where we ident i fy four or f ive top things we expect t rade
performance on . One of them should be the t rade def ic i t . We should see
movement down.
I think a second should be IP thef t . A third should be fai rness in
t reatment of foreign companies there , and a fourth should be forced ,
coerced tech t ransfer , and a f i f th should be something around cyber theft
and o ther sorts of d i rec t espionage to s teal our intel lectual property.
We know how much they' re doing, I bel ieve . I think the NSA and other
parts of the intel communi ty know that , and I think we just have to say here
are the met r ics where you are now; th is is what we expect . If we don ' t see
progress , we 're not going to be ne got iat ing wi th you the way we have been
before.
COMMISSIONER WESSEL: Okay. Mr. Harris .
MR. HARRIS: About a month ago, I at tended a big U.S . -China event
in Seat t le , and at that event one of the speakers was from a very large
Chinese In ternet company th at recent ly went publ ic , and th is company is
now doing bus iness in the United States , and i t has aspi rat ions to do a lot
more business . And this very high -level employee of this company talked
about cul tural d i f ferences and how this Chinese company would h ave to
deal wi th cul tural di fferences in the Uni ted States s imilar to the cu l tural
di f ferences that t r ipped up big American Internet companies in China.
And I can ' t remember whether he named any of the big American
companies or not , but tha t rea l ly drove me crazy because the problems that
have held back American In ternet companies in China, whi le they may have
been in smal l part cul tural , in large part they have been s t ructural and
legal . Many of them are basical ly not al lowed to do what they do over here
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over there, and what was frust rat ing to me was how i t seemed that vi r tual ly
nobody in this gian t room knew that , and these are people who deal wi th
China al l the t ime.
And many tech companies , part icu larly the smal l and mid -size ones,
have no clue as to what 's go ing on in China , and i t ' s very popular among
them and among the media to cr i t i cize companies l ike Microsoft , Facebook
and Google and Amazon and eBay, for not having succeeded wild ly in
China as though somehow i t i s due to thei r own lack of vi s ion or inabi l i t y
to adapt and not due to the fact that i t 's an ex t remely di f f icu l t l egal t er rain
over there for them, and in a lo t of areas i t ' s forbidden.
COMMISSIONER WESSEL: Thank you.
HEARING CO-CHAIR SLANE: Commissioner Fiedler .
COMMISSIONER FIEDLER: Mr. Atkinson, I was int r igued by your
his tor ical example about Japan and the t rade wars and American companies
and American workers . Can you give me a s ingle good reason why
American workers should care that American companies are get t ing
pummeled in Ch ina today in l ight of everything that has gone on in this
count ry in the las t 20 years?
DR. ATKINSON: So let ' s l eave the las t years as ide and jus t say --
COMMISSIONER FIEDLER: Okay. Ten.
DR. ATKINSON: No, no . My point is just going forward . So you can
argue about the las t 20 years , good or bad , but jus t l et ' s say going forward ,
are U.S. workers bet ter of f or worse off i f the Chinese government succeeds
in i t s de -U.S . t echnology campaign?
And here i s why I bel ieve American workers wil l be bet ter of f ,
s ignif icant ly bet ter of f . U.S . companies ac tual ly do employ American
workers here part l y because they have Chinese markets . Now they may not
be f ront - l ine product ion workers , bu t they' re sales workers , they' re
designers , they' re technicians , they' re R& D. Those are workers , and i f we
don ' t have market access in China, and i f the Chinese s tar t to go out and
take market access away f rom us . So I 'm not ful ly of the v iew that U.S.
mult inat ional interests are completely a l igned with U.S. , bu t they' re not
negat ive . There i s - -
COMMISSIONER FIEDLER: No, my point is I 'm not sure that U.S .
workers ' interes ts are necessari l y a l igned with U.S. company in teres ts .
Okay. Number one.
DR. ATKINSON: Yeah. Yeah.
COMMISSIONER FIEDLER: Number two, I mean I ' l l give you a sor t
of counter intui t ive - -people tel l me i t ' s counterin tui t ive. I bel ieve that i f
the Chinese s top s teal ing intel lectual proper ty, we ' l l lose more jobs because
one of the few things that is keeping U.S. companies f rom going there up
unt i l now was t hat they were af raid of get t ing thei r s tuf f s to len . If they' re
not af raid of get t ing thei r s tuf f s tolen , then more jobs wil l l eave, and they' l l
go over and manufacture, in China.
So I don ' t see the convergence. I would jus t advise you as a
representat ive of American workers tha t workers don ' t see the convergence
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of the interests in this country i f wages are s tagnat ing, jobs are - -yeah , they
got a job. They're working three. Okay. So don 't be so sanguine
pol i t ical ly that we real ly care that Microsoft wh o tolerated cheat ing for the
f i rs t t en years of i ts -- I mean s tea l ing and theft for the f i rs t ten years of i t s
ex is tence in China , tha t I should now care great ly that they' re get t ing
pummeled or Qualcomm is get t ing squeezed. Okay.
Because they didn ' t give much of a concern for American workers over
the las t 15, 20 years . I mean i t ' s just na tural sort of react ions of human
beings. Okay. Other than compassion on some geopol i t i ca l l evel that
Americans are get t ing bashed by, you know, foreigners , which is m ildly
xenophobic, I haven ' t heard a lot of arguments yet why, where , how
American workers benefi t f rom al l o f th is . And I haven 't heard i t for the
las t 20 years so I 'm just cont inual ly looking for i t .
DR. ATKINSON: So I think that I 've heard that argume nt before f rom
people that you and I both know and very prominent arguments l ike, you
know, let them stew in thei r juices -- le t them, you know, s i t there and take
their own medicine because they've hur t American workers and they' re not
loyal .
If we do that , i t ' s more div ide and conquer resul t f rom the Chinese
government . I think the only way to respond to the Chinese pol icies i s i f
we are complete ly unif ied and we say that i t ' s importan t to confront the
Chinese on these pol icies . Now one col lateral effect wi l l be to help U.S.
companies .
COMMISSIONER FIEDLER: And let me just say, Rob, for your own
thing, you sort of overstated yoursel f when you said that th is is more
importan t than human r ights , more important than thi s , more importan t than
that . I mean because I 'm not at al l certa in that i t i s and that the average
person would share that v iew. I appreciate the advocacy involved in the
s ta tement , but I think i t ' s a bi t o f an overstatement .
DR. ATKINSON: Just to be clear , when I said that , I was refer r i ng to
get t ing the overal l Chinese economic sys tem right so that i t i s no t
mercant i l is t and having a big t rade def ic i t .
COMMISSIONER FIEDLER: Yeah, but i t ' s not an economic thing.
We're talking a base , a pol i t i ca l sys temic change that is necessary in ord er
to gain the economic change. I think we 've had enough demonstrat ing over
the las t 20 years - -you can disagree wi th me -- that we thought tha t t rade was
going to br ing democracy; r ight? We heard that argument . It hasn ' t even
brought a modicum of the rule of l aw except in a couple of cases - - r ight --
where we got 3 ,000 IP judges now, which is I guess progress of some kind.
But , so you 're ta lking incremental ly when the fundamentals are
actual ly, i f one does a pol i t ical analys i s and the consol idat ion of Xi 's
power, looks l ike the sort of pol i t ics are get t ing a l i t t l e ugl ier and a l i t t l e
less consensual ins ide China. So I 'm not so sure that tha t i s the
envi ronment in which economic change that is favorable to what you
perceive to be our interest is going to hap pen.
That 's al l . I mean i t 's a tough envi ronment r ight now pol i t ical ly.
83
Forget the economics.
DR. ATKINSON: Absolutely. But I think --
COMMISSIONER FIEDLER: This is a pol i t ical decis ion that ' s
happening to American companies; i t ' s not an economic de cis ion only.
DR. ATKINSON: The a l ternat ive --so there are people who say we
should just wai t in the long run , and as Keynes said, " In the long run, we 're
al l dead ." And I think the long -run argument , frankly, jus t won ' t work
because--so, yes , eventual ly, eventual ly in China , there wi l l not be a
Communis t Party that cont ro ls that China . That is the hi s tory of a l l
development . You get to a cer ta in poin t in development and you become a
democracy. That wi l l happen in China. I have no doubt tha t that wi l l
happen.
I don ' t know when i t wi l l happen, but i t wi l l happen. The problem,
though, i f we wai t unt i l thi s n irvana of democracy and market opening
comes up, by that t ime the damage wil l be so severe that the U.S . wil l have
lost compet i t ive advantage in sector af ter sector - -autos , ai rp lanes, je t
engines , al l these , semiconductors - -a t which point we can ' t get i t back .
COMMISSIONER FIEDLER: I agree with that . Okay.
DR. ATKINSON: And the consequences for U.S. workers wil l be
fai r l y severe , in my view.
COMMISSIONER FIEDLER: Yeah. You’ve got to be a l i t t le more
specif ic in the end than sort of short - term advocacy. It 's no t - - the
condi t ions that ex is t in the United States now just don 't persuade people ,
but I ' l l leave i t alone. Thank you.
MR. HARRIS: I f I could brief ly answer that . Let 's t ake something
l ike solar power where China by engaging in compet i t ion with Chinese
characteri s t ics has managed to dominate that indust ry worldwide. That has
to have reduced American jobs in that indust ry.
I a lso think i t ' s a l i t t le bi t shorts ighted to ignore the fact that , what
Mr. Atkinson touched on , which i s that when American companies do wel l ,
of tent imes the American worker does wel l .
Now you 're talk ing about mult inat ionals , but there 's a s tory I a lways
l ike to tel l . I have a cl ient , who is a consul tant , and he came back f rom
China and was on an ai rport bus ta lking with someone in Ohio, and that
person was tel l ing my cl ien t that he was going to have to shut down his
business that employed 16 people because -- i t was a windmil l business of al l
things --and he was going to have to shut i t down because he could no
longer compete wi th China .
My cl ient sa id “ I can help you. You should be get t ing more of your
parts from China . ” My cl ient helped th i s company, and withi n a year hi s
company went f rom 16 employees in the United States to 50 . Now, one
example, one smal l example does not an economy make, but I think wi thout
a real deep d ive analysi s across various indust r ies , I don ' t think we can
answer i t .
COMMISSIONER FIEDLER: By the way-- I ' l l l eave i t alone -- I wasn 't
making an economic point . I was making a pract ical pol i t i cal observat ion
84
and d iscussion, which is American workers have not had pret ty decent
shake in this whole China relat ionship. So I don 't expect them to wake up
one day and join a march to help companies that d idn 't par t icular ly help
them when they were at thei r worst .
HEARING CO-CHAIR SLANE: Mr. Atkinson, as a fol low -up, and we
do appreciate you coming here and ta lk ing to us , but I and others have b een
informal ly to ld by Chinese government off icia ls usual ly at the end of a
banquet tha t we have no intent ion of turning our domest ic market over to
foreign companies . And do you see that as the long -term end game here?
DR. ATKINSON: Absolutely. The Ch inese , and there 's a famous ,
maybe not famous , quote , but Larry Summers once said that economic laws
appl ied on al l t imes and al l places . And I think he f rankly doesn ' t
understand China because they don ' t think about economics the way we
think about economics . We fundamental ly have a consumer -oriented
economics view. We look at pol icies on how wel l they af fect consumers .
We have bought into David Ricardo 's v iews of t rade. We special ize in
some things . Our t rading partners special ize in others . We t ra de.
Everybody i s bet ter of f . The Chinese fundamental ly don 't buy into that .
Eventual ly they might , bu t they don ' t , in my v iew.
I think they buy into an autocrat ic sys tem where i f you look at the
MLP, for example, in 2006 l i s ted 402 or so technologies . Actual ly le t me
put i t another way. I can ' t f ind a s ingle technology that the Chinese
government does not want to be sel f -suff icient in . I can 't .
I think they want to be sel f -suff icien t in every technology. Now
maybe they' re wil l ing to import , you kno w, pigs fee t or whatever . But
when i t comes to the real ly important t echnologies of the future, the
Chinese government , in my v iew, does not bel ieve in t rade . They bel ieve in
export . In that sense, the way to get there is to make sure they cont rol the
domest ic consumer market for thei r own producers . So I do th ink that 's the
end game.
MR. HARRIS: I th ink China does think about economics the way we
think about economics . They just don 't pr ior i t ize economics the way we
prior i t ize economics. And by that what I mean i s that --and I see i t wi th our
own cl ien ts -- they of ten t imes say, wel l , this can ' t be the case in China , i t
doesn ' t make economic sense , and our response i s r ight , and China doesn 't
rea l ly care.
We're always looking to see what they' r e t rying to do economical ly,
and in rea l i t y what they' re rea l ly t rying to do, in my opinion , is pol i t i cal .
Above al l else, the Chinese government is concerned with s taying in power,
and that i s how i t runs i ts economy.
Our movie indus try cl ien ts , they a lways say “we feel l ike the Chinese
government hates us ,” and our response is “yes , and that ' s because the
Chinese government basical ly hates movies . ” I t ' s a form of communicat ion,
and so I don 't di sagree at al l wi th what Mr. Atkinson says about what the
end resu l t of al l thi s is going to be , but I do th ink China fu l ly unders tands
the economic issues . It ' s jus t tha t they' re absolutely wi l l ing to t rade
85
percentages in growth or whatever in favor of maintaining cont rol and
securi ty.
HEARING CO-CHAIR SLANE: So i t doe sn ' t sound, Mr. Harri s , l ike
your cl ients seem to get i t , real ly where the Chinese are going, and that in
many cases , they' re just being used?
MR. HARRIS: Wel l , that sounds l ike two di f ferent quest ions. I th ink
a lot of them do fai l to get i t . I think one of the things we 're always tel l ing
them is tha t they should read China 's Five Year Plan because China does
not hide the bal l as often as people think that they do, and China in i ts
press talks about exact ly what they' re doing.
Right before I came here thi s morning, I got an e -mai l f rom a f r iend of
mine who sent me an ar t icle from a Chinese government newspaper talking
about how they wil l never al low American companies into the In ternet
space and , oh, by the way, tha t also has the nice ef fect of help ing Chinese
companies .
If you read the Chinese press , you can see what China’s goals are and
where they' re heading, and you can see i t in the Five -Year Plan as wel l , and
American companies - -and th is is not necessari l y cr i t i ci sm of American
companies because i t 's the case for al l companies - - they have a natural
tendency to assume that the ent i re world is l ike the way they are used to
doing bus iness , and that the same cons idera t ions apply, and they don 't in
China.
HEARING CO-CHAIR SLANE: Thank you.
Katherine.
COMMISSIONER TOBIN: Thank you, both .
Dr . Atk inson, f i rs t , I worked at Hewlet t -Packard and IBM, and though
I would agree wi th Commissioner Fiedler tha t the American workers might
not be running in support of the corporat ions, I think increased jobs wil l be
something that younger workers do f ind importan t . So I think I share your
viewpoint that we need to see as posi t ive what American companies in high -
tech can provide. And when I read your tes t imony, I loved what you are
saying. We've got to concentra te . We've got to be more clear -eyed and
discip l ined . These are , in a way, our nat ion’s crown jewels .
Years ago , there was a Counci l for Compet i t iveness that zeroed in on
various t rade i ssues in high -tech. John Young of Hewlet t Packard was the
leader of that . I 've not kept abreast of what we have, but i s there any
comparable- -
COMMISSIONER REINSCH: It s t i l l ex is ts .
COMMISSIONER TOBIN: Good, I hear i t s t i l l ex is ts . And are they
act ing in any way that you can report on for us?
DR. ATKINSON: Well , f i rs t o f al l , yes , John Young was a -- I don 't
know if Mr. Young is s t i l l a l ive.
COMMISSIONER TOBIN: He i s al ive .
DR. ATKINSON: He 's an amazing American who I have met on a few
occasions and have enormous amount of respect for his l eadership in the
'80s and ear ly '90s in th is space.
86
The Counci l on Compet i t iveness s t i l l ex is ts . I don ' t be l ieve that they
take exact ly the same or ientat ion and approach that they d id back then . I
think because , in part , as I said earl ier , I think that back then i t was our
businesses versus thei r bus inesses .
COMMISSIONER TOBIN: Right .
DR. ATKINSON: And so we had a very clear intere st of our CEO
community to real ly push back agains t what the Japanese were doing
because i t di rect ly a ffected their bot tom l ine in the U.S . , and that ' s why I
bel ieve you had s t rong support f rom the Reagan adminis t rat ion, the Bush
adminis t ra t ion. It ' s di ff erent now.
It ' s part l y d i fferent because global izat ion is bigger , bu t , as I said , I do
think that the pendulum is going more into that di rec t ion. I mean I have
had conversat ions with U.S . t echnology companies f ive years ago , including
when I was in Shanghai and met with the American Chamber there, and i t
was very much about how China is this great place and , you know, we 're al l
going to make a lot of money, and i t ' s a fan tast ic envi ronment for us . And,
yeah , there 's a few problems, but , you know, those a re bumps in the road
that we just work around.
I don ' t hear that today in the same way. I hear much deeper
frust rat ion , much more recogni t ion that these are s t ructural problems and
much more recogni t ion that they' re essent ial l y in survival mode. They
understand that they have a target on thei r head, and they' r e t rying to have -
- they' re at r i sk of being replaced . So I do think that ' s di fferent .
Let me make one response that you said about the jobs th ing. Let ' s
just t ake In te l for a moment . You know th e Chinese have the new
semiconductor plan that they came out with las t year , you know, s tandards
manipula t ion, massive subsidies , a whole se t of other things , government
procurement , and thei r goal is to rep lace In te l . That i s thei r goal .
Now imagine them replacing In tel . Inte l has a number of fabs in the
U.S . You know, they have R&D in Si l icon Val ley, but they have fabs in
New Mexico.
COMMISSIONER TOBIN: Arizona.
DR. ATKINSON: Arizona, and they cer tainly have faci l i t i es up in
Oregon, and those are workers who are blue -col lar workers . They're
technicians , they' re highly ski l led , but they are blue -col lar workers and who
make qui te a fai r sa lary. Those jobs are at r isk i f Intel loses global market
share in a s igni f icant way, and so I do think , I real ly do think there 's an
al ignment , and I understand the bi t t erness of the past . I understand that ,
and don ' t ge t me wrong, but I th ink th is is such an issue that we have to t ry
as best as possib le to put emotion aside and look pret ty c learly and
resolutely a t our interests today.
COMMISSIONER TOBIN: So just one thought on that . Besides the
negot iat ion, the governmenta l approach to gain resul ts , I do think we need,
i f not the Counci l , some coming together of the high - technology world
concerted ly because i t did work before , and as you sa id, i t ' s shi f t ing.
Mr. Harris , assuming you have ten cl ien ts out the door , based on the
87
pic ture you presented, the clar i t y of which we a l l appreciate , do you f ind
that many of your cl ien ts decide I 'm not going to work ther e? I 'm not going
to take our business there , and do they divert anywhere e lse, or i s i t so
worth i t to them? So what 's your experience?
MR. HARRIS: They most ly go in . It ' s just too tempting.
COMMISSIONER TOBIN: Uh -huh.
MR. HARRIS: But what 's inter est ing is mos t of them do wel l there,
and that was even t ruer two years ago . There is defini te ly an increased
level of fear and frustrat ion by American companies in China, and that ' s
been growing for years . A lot of i t i s due to the legal regime, but al s o a lo t
of i t i s due to the fact that the compet i t ion there is incredibly in tense and
costs are r i s ing.
But there is s t i l l general ly a view that i f we are going to be , and by
"we" I mean our cl ients are saying this , i f we ' re going to be an internat ional
player , we have to be in China . But a lo t of them are more concerned today
than they were even two years ago about hedging thei r bet s .
So you 've got the huge companies , le t 's say l ike Nike, and they've been
in- - I don ' t know--20 , 30 count r ies forever. A l o t of our c l ients had al l of
the ir eggs in the China basket for , l et ' s say, manufacturing, and they've had
problems, and they rea l ize that even though they' re not huge companies
maybe they should open up a fac i l i t y in Myanmar , Indonesia, Vietnam. So
there def ini tely i s , has been a change in mind -set in the las t year or two.
What I th ink is in terest ing about China is tha t , and I 'm going to echo a
lot of what Mr. Atk inson said, is that there was t remendous opt imism by
American companies and America, in gene ral , about China , and f rom my
perspect ive every year in China things got bet ter , and then --and maybe I 'm
put t ing too much s tock in one smal l inc ident --but when a frui t vendor in
Tunis ia se t himsel f on f i re , i t seemed l ike very soon thereaf ter China got
more paranoid, and basica l ly s ince then the improvements have been few
and far between, and there has been more t ightening up in various areas .
To a large ex tent , I think that the frust rat ion s tems more f rom the lack
of improvements as opposed to the t ighten ing up.
COMMISSIONER TOBIN: Thank you.
I know my other col leagues have quest ions .
CHAIRMAN REINSCH: Yes. Commiss ioner Bartholomew.
COMMISSIONER BARTHOLOMEW: Thank you. Gent lemen, real ly
interes t ing. My quest ions kept sh if t ing as your comments we re being made.
Rob, just real ly a comment more than anything. It ' s honest ly hard to see
anything that ' s t reated less important than human r ights when i t real ly
comes down to i t . But I just wanted to make --because you said i t needed to
be t reated as more important than human r ights , but that t reatment of human
r ights would actual ly address a number of the issues that the companies that
Mr. Harris represents are facing.
So, for example , i f there was f reedom of speech, the publ i shers and the
movie houses wouldn 't be having the problems. If there was f reedom of
associat ion, freedom to organize , then workers in the plants where OSHA -
88
kinds of pro tect ions , environmental protect ions , al l o f those that are being
ignored , would have an oppor tuni ty to improve thei r own working
condi t ions. So I don 't think we should separate i t out . Just a comment on
that .
Mr. Harris , I 'm part icu larly interested because you are working wi th
essent ial l y smal l and medium caps, those are the kinds of companies that
we want to be abl e to break into the China market , bu t I confess that I 'm
baff led that anybody nowadays would say that they don ' t know what 's going
on in China . I mean everyday on the f ront page of the newspaper, any
newspaper , there are s tories about i t .
So when I hear you say a lso you 're s i t t ing in this conference room with
these importan t Chinese Internet companies , which go unnamed, I jus t
wonder whether i t 's ignorance or whether i t 's that people (a) bel ieve that
they' re the ones who are going to be doing things d if fe rent ly and wil l
succeed , or (b) they don 't want to raise the di f f icu l t quest ions because they
fee l tha t i t wi l l somehow disadvantage them?
MR. HARRIS: Al l of the above. One of the things that I have always
found in teres t ing i s tha t I wi l l blog, and I 've wri t ten on this issue probably
once a year over the las t s ix or seven years , about how i f you owe someone
a debt in China, i f you owe someone money in China , or even i f they jus t
al lege that you owe them money l ike , for instance --and thi s happens a lot
wi th our cl ien ts -- they' l l ge t a bad sh ipment of product , and they won 't pay
for the second hal f of i t because i t 's a bad sh ipment , and the Chinese
company is having a l l sor ts of f inancial problems, and they wil l then sue
our cl ien t in China.
And we tel l our c l ients do not go to China . Do not have anyone f rom
your company go to China . You could get held hos tage . And we get f ive or
s ix cal l s l ike that a year . I have a f r iend who is with a r isk advisory
company, and jus t h is Shanghai of f ice gets f ive or s ix of those cal ls a
month. Yet whenever I wr i te about that , I get al l sorts of angry comments
saying that I 'm making i t up . I ge t e -mai l s saying I 'm making i t up, and I ' l l
even get e-mai ls saying why are you saying that t hat ' s going to cause
American companies not to do business in China , and i t ' s going to hur t your
own business .
There are probably 100,000 China consul tants out there who sel l thei r
services by c laiming that they can achieve var ious things in China, and
there are a lot of Chinese in China who say the same thing. I hinted at i t
when I t alked about the fact that we always have to deal with Chinese
employees of our own cl ients who are tel l ing our c l ients , look , you don ' t
need to do this , you don 't need to do that , th is is how i t 's done, jus t s t i ck
with me, and there are Americans who bel ieve i t , there are American
companies who actual ly enjoy that sort of thing. We a lways f i re them as
our cl ien ts .
And everybody thinks they' re special , I mean to quote Garri son
Kei l lor . We get tha t a lo t . Oh, no , this Chinese company would never do
that to us; I went to the owner 's son 's wedding.
89
COMMISSIONER BARTHOLOMEW: It ' s amazing. I ' l l have another
round i f we go to another round.
DR. ATKINSON: Could I just qu ickly respond to the human r ights
quest ion? My point on that - -by the way, I would di f ferent ia te between
worker r ights , i f you wil l , and sor t of f ree speech and civi l l iberty r ights .
Maybe you don ' t . I do.
My only point on that is we should advance an agenda with China that
is in our interes ts , and to me the human r ights agenda for Chinese ci t izens ,
i t 's in our long-term interests , but you only have so much pol i t i cal capi tal
and so many chi ts to use when you 're negot iat ing wi th the Chinese , and i f
we put human r ights at the top ahead of our eco nomic interests for our
workers , then I think we 're not going to be able to advance those as
effect ively ins tead of put t ing those at the top.
COMMISSIONER BARTHOLOMEW: Well , f i rs t , we could debate th is
for hours so we won ' t . But I disagree with you that tha t 's sort of not
fundamental ly in the interest of our workers , and that they are divis ible the
way that you are talking about because they are cer ta inly connected .
But I al so would say that I have in 25 years of working on U.S . -China
pol icy never seen human r ights at the top of that l i s t . So --
HEARING CO-CHAIR SLANE: Dennis .
VICE CHAIRMAN SHEA: Well , thank you both for being here. It ' s
been a rea l ly fasc inat ing discuss ion .
Dr . Atk inson, I heard you say--you wrote i t in this op -ed ca l led "High
Tech Harassment ." It woke me up out of my s lumber as I was going
through the br ief ing book. It was real ly pre t ty charged, but you said today
that the Chinese, and correct me i f I 'm wrong, the Chinese have no
intent ion of al lowing Western companies to domi nate or have a s igni f icant
share of their domest ic , key domest ic markets , including h igh -tech. Is that
fai r to say? That 's your posi t ion?
DR. ATKINSON: High - tech is what I know the bes t so, yes , in h igh -
tech , I would say that .
VICE CHAIRMAN SHEA: Oka y. Now that ' s sort of a paradigm shif t ,
as Commiss ioner Bartholomew mentioned yes terday. Do you th ink the
people in the U.S . government understand that? I t end to bel ieve you. I
accept your propos i t ion , but do you think the people in the U.S. governmen t
who make decis ions on our behal f understand that?
DR. ATKINSON: As a group, I do not bel ieve they do. I th ink they
s t i l l bel ieve that the Chinese government has bought into the Ricard ian
t rading sys tem that is a core par t of our whole economy. I thin k they
bel ieve that the Chinese are more or l ess l ike that .
VICE CHAIRMAN SHEA: Okay. Do your, do the high -tech
companies , the leadership of the high -tech companies , the U.S . and o ther
Western , understand that , buy into that view?
DR. ATKINSON: Increasingly they do .
VICE CHAIRMAN SHEA: Okay. This is a paradigm shi f t . Now are
they wil l ing to s tep up and say that , o r are they -- I think i t would be
90
incredibly powerful i f someone l ike Bi l l Gates , who I understand is ret i red
from Microsof t , though owns, I understand, qui te a bi t o f shares in the
company, but i f someone l ike h im were to s tand up and say something l ike
that would be very, I think, very powerful .
DR. ATKINSON: It would be powerful , but what U.S . companies have
learned in a very bi t ter way that i f they s tand up and say anything, they wil l
be the next vict im. They wi l l be the next target . They wil l have Chinese
invest igators at thei r door a t 7 a.m. in the morning tak ing thei r computers
away and not giving them a hear ing. They know that .
And I think i t 's incumbent upon U.S. government off ic ia ls and the top -
level of f icials to come to thi s rea l iza t ion on their own. It would be nice i f
U.S . t echnology--my understanding i s U.S . t echnology companies say these
things in private. They explain th ei r s i tuat ion to U.S. government off ic ia ls ,
but I don ' t bel ieve i t has penet rated or permeated in our t rade establ ishment
in the U.S.
VICE CHAIRMAN SHEA: Now, the program you out l ined in your
tes t imony, sort of recogni t ion of this new paradigm, understan ding the
problem, creat ing an off ice, new office within the USTR, giving them a few
extra mil l ions of dol lars , br inging more t rade cases , which take years in the
WTO-- I 'm just paraphrasing that --an t i t rust exemption , which by the way the
Commission recommen ded four or f ive years ago that there should be an
ant i t rus t exemption -- i t doesn ' t seem, in al l respect , and I 'm sympathet ic , I
agree with you, i t doesn ' t seem l ike i t would do the job, i t would reverse
this s i tuat ion even over a number of years —but the tools in the tool box
don ' t seem st rong enough.
I just would l ike you to comment on that . It seems l ike thi s is the
conundrum. What can we real ly do about i t?
DR. ATKINSON: That 's the conundrum, and whenever I go to these
events and ta lk to U.S. of f icia l s , they a lways say the same thing: what can
we do? And I guess so I don ' t know the answer to that , but I have two
answers . And one answer is i f we real ly bel ieve this is a serious threat , i f ,
for example, th is were a mi l i t ary threat , and we didn ' t have the r ight
weapons, we 'd f igure out how do we develop the r ight weapons or how do
we use the other weapons in the r ight way?
This isn ' t a mil i t ary threat . I 'm not saying that . So I think the f i rs t
s tep would be, as we 've argued, there needs to be some ki nd of nat ional
commission on mechanisms to deal with the Chinese threat . Bring together
some of the leading t rade at torneys in Washington, bring together real
expert s who know every s ingle nuance of U.S. l aw, internat ional l aw, al l
the various tools we could use, whether i t 's immigrat ion of s tudents , l et ' s
put al l the poss ible tools on the table as a tool box because I agree that the
tool box is pret ty th in r ight now.
Af ter that , then i t 's a quest ion of , I think, deciding how far we want to
go and which ones we want to do , but I al so , I would say, for example , i f
you look a t some of the things where we have succeeded against Chinese
what we cal l "innovat ion mercant i l ism" -- things l ike the agreement cal led
91
Green Dam; we 've succeeded somewhat on indigenous in novat ion product
catalogs; the VAT subsidy on semiconductors -- they a l l had one thing in
common, which was that there was a fai r l y s t rong unif ied push .
And in the case of indigenous innovat ion, i t was our bus iness
community, our government , the European bu siness community, and thei r
government . And I think fundamental ly that 's the di rect ion we have to go
in . And i t just has to be elevated. This is the s ingle b igges t t rade i ssue the
U.S . government i s going to face for the next 20 years . The s ingle biggest
one.
And i t ' s Europe 's s ingle biggest one , and the problem is Europe is
far ther behind than we are , I be l ieve, in understanding that . But I think
what the next adminis t rat ion has to do i s bui ld real ly s t rong al l i ances with
Europe, and so at one level I do think that , sort of , basical ly tel l ing China
you are going to be shut out of the global economy in a way, you know,
unless you reform what you 're doing, and Japan and Europe and America ,
we al l agree wi th th is , I do th ink there i s some leverage there. I agree with
you, the tool is a big problem.
VICE CHAIRMAN SHEA: That real ly takes rea l l eadersh ip, doesn 't i t ,
to- -
DR. ATKINSON: Yeah.
VICE CHAIRMAN SHEA: -- to put that --
DR. ATKINSON: Yes .
VICE CHAIRMAN SHEA: It worked to some degree in the indigenous
innovat ion because-- though I think they are c i rcumvent ing --
DR. ATKINSON: Yes .
VICE CHAIRMAN SHEA: -- the wri t ten rules - -
DR. ATKINSON: Yes .
VICE CHAIRMAN SHEA: --by--
DR. ATKINSON: Yes .
VICE CHAIRMAN SHEA: Yes. But i t real ly takes leadership.
DR. ATKINSON: Yeah.
VICE CHAIRMAN SHEA: And someone ful ly commit ted to achieving
this object ive.
DR. ATKINSON: I agree with that , but I have to say I do th ink there
is a ro le Congress can play, which i s just , you know --obviously, you p lay a
cr i t i cal role- -but I think the relevant commit tees in the House and the
Senate, having more hearings on this , you know, rais ing these s t ra tegic
quest ions in hearings and get t ing more tes t imony on that , I think that can
help move the bal l and basical ly s et a tone f rom Congress to whoever i s
going to be the next president af ter the elect ion that thi s is going to be
something Congress is going to demand some changes on .
VICE CHAIRMAN SHEA: My t ime is up, but I ' l l jus t say col lect ively
i f some of the h igh - tech leaders working as a group got together in thei r
own voice and made, you know, s tatements that you 're making today I think
i t would be very powerfu l , but I 'm just throwing that out there .
DR. ATKINSON: I would jus t add there 's a le t ter I know going out
92
today that I 'd be happy to share with you. You 'l l p robably see i t . I 'm not
sure exact ly what t ime i t ' s going out today, but i t ' s by a number of major
U.S . t rade associat ions going speci f ical ly at thi s point of using these
securi ty excuses in a way to shut U.S . companies out and how they s t rongly
decry i t . So there i s some of that going on . I agree wi th you that more
would be bet ter .
VICE CHAIRMAN SHEA: Thank you.
CHAIRMAN REINSCH: It ' s an excel lent l et ter .
DR. ATKINSON: Have you seen i t?
CHAIRMAN REINSCH: We signed i t .
[Laughter . ]
CHAIRMAN REINSCH: My day job organizat ion s igned i t .
HEARING CO-CHAIR SLANE: Carte .
COMMISSIONER GOODWIN: Thank you.
Dr . Atk inson, I 'm in tr igued by your suggest ion of the ant i t rust
exemption, but I 'd l ike to p lay the role of the devi l ' s advocate here jus t to
get the sense as to how both the witnesses think the Chinese might respond
to i t .
I would think f rom thei r perspect ive, they might f ind i t a bi t i ronic that
in response to what we are characteriz ing as the se lect ive enforcement of
ant i -monopoly laws, that we want to select ively enforce our own ant i -
monopoly laws and al low, through a s ta tutory exemption, agreements
res t raining t rade. So what is your sense as to how such an exemption would
be received by the Chinese?
DR. ATKINSON: So, f i rs t o f al l , I would envis ion any adjustment to
our ant i t rus t regime to be, f i r s t of a l l , s tatutory in bas is , I mean
congressional l egis lat ion modeled after the '84 Cooperat ive Research and
Development Act that Congress p ut in p lace, and a t the t ime the Congress
said we think i t 's important that companies are able to coopera te in free
compet i t ive R&D, and there is confusion at sort of bes t in the ant i t rust l aws
that prohibi t o r prevent companies f rom doing that . So we pas sed a law to
engage in one of these , you have to go to DOJ and you have to have an
approved research col laborat ion , and DOJ approves a number of these every
s ingle year .
I would envis ion a s imilar agreement , where companies would go to
DOJ and get approva l . So this would not be ex t ralegal . This would be part
of the legal sys tem, and i t would jus t s imply say in our ant i t rust regime, we
bel ieve that inter - f i rm cooperat ion in certain areas can be welfare
maximizing. I think the second point is , and I think we would have to
make that qui te clear to the Chinese , tha t thi s i sn ' t jus t carte blanche. In
my argument you would have to have incredib ly s t r ict ru les that thi s cannot
inc lude price co l lus ion or o ther k inds of things that would be
ant icompet i t ive . This is real ly about al lowing companies to make the
decis ions that they want to make with regard to technology t ransfer .
Las t ly, I would just say the Chinese wil l use anything we do to thei r
own interes ts . They're very, very good at that . And they fo l low what we
93
do qui te ef fect ively, but I think we know and they know that i t ' s a t alking
poin t for them, I guess . So, yes , maybe they'd have another talking point ,
but I think we would be bet ter of f having that too l in the tool box .
COMMISSIONER GOODWIN: What sort of s tandards would you
ant ic ipate for es tabl ishing the nat ions that would qual i fy as engaging in , as
you put i t , coercive act ion? I mean f rom my perspect ive I would think that
would be fai r l y cr i t i cal . Well , I suppose the Chinese are going to see t his
as being di rected at them in any event , but to have i t balanced and have i t
apply equal ly across the board to al l sorts of countr ies and jur isd ic t ion.
DR. ATKINSON: Sure.
COMMISSIONER GOODWIN: What sort of s tandards do you think
should be put in pl ace to define what is coercive government act ion?
DR. ATKINSON: Well , China i s not the only government that uses
forced local izat ion pol icies to get coerced tech t ransfer or coerced
investment . Brazi l does i t . India is t rying to do i t . So I think a pol icy l ike
this could have beneficial ramificat ions in other big markets where U.S.
companies face that kind of threat .
Again , I don 't th ink there is anything inherent ly ant i -consumer about
companies cooperat ing and saying we 're not going to give technology to our
compet i tors . That 's real ly what thi s i s about . It ' s about saying we bel ieve
we should be ab le to go into a market and not have to give them our
technology. That 's a core principle of the WTO.
Al l thi s rea l ly is saying is that we 're level ing the playing f ield and
giving the ent rant or the company some l i t t l e bi t more negot iat ing power.
So I don ' t see i t in any way as an t i -consumer because i t ' s real ly, un less you
buy in to thi s not ion that somehow these countr ies deserve our technology
for f ree because they' re poor, which we fundamental ly rejec t , I don ' t see i t
as ant i -consumer.
COMMISSIONER GOODWIN: Thank you.
MR. HARRIS: I don 't real ly have anything to add to what Dr .
Atkinson said regarding the big pol icy issues . But what I wi l l say is that - -
and this is f rom a pract icing lawyer perspect ive -- I know i t can be very
dif f icu l t to determine what i s coercion and what isn ' t .
I remember many years ago Korea had a l l sor ts of rules about buying
foreign cars , and they were pressured to re lax or s t r ike those rules , and I
wouldn 't see any more foreign cars on the road in Korea, and I asked a
Korean lawyer f r iend of mine why that was the case, and he said , “wel l ,
because everyone knows that i f they buy a foreign car , they' re going to get
audi ted on their t axes .”
So I 'm just put t ing that out there to show how hard i t can be to
monitor , and even some of our cl ients get that wi th China today where le t 's
say they' re supplying something to the Chinese banking sys tem or they have
an envi ronmental product , there wi l l be noth ing in wri t ing, but somebody
wil l t el l them, hey, l is ten , we 've been told that there are people who are not
happy about us buying your product as opposed to a not nearly as good
Chinese product .
94
So would you do us a favor and instead of sel l i ng i t to us f rom the
United States , would you form a company in China and sel l i t to us that way
or would you set up a Chinese dis t r ibutor or Chinese joint venture deal? So
my only comment is that these things are of tent imes not very c lear -cut .
COMMISSIONER GOODWIN: Thank you.
HEARING CO-CHAIR SLANE: Bi l l .
CHAIRMAN REINSCH: Well , as Rob knows, we general ly agree on
these things. I want to pursue a couple comments you made driven by your
response to Kather ine about that was then/ thi s i s now on the Co unci l on
Compet i t iveness .
I think you 're r ight tha t where we 've had success with China, has been
when we 've been able to mul t i l ateral ize the message. It ' s easy for them to
dismiss an American message as par t of the great American plo t to thwart
the ir r is e. It ' s harder to d ismiss the internat ional communi ty tel l ing them
that they' re an out l ier , which i s a posi t ion they don 't l ike to be in . . The
Green Dam case you ci ted i s a good example where we had some success .
There are a couple of others . It ' s , yo u know, two s teps forward, one s tep
backward, but a good s t rategy.
I think along with that pers i s tence, uni ty of message is a lso relevant .
We have to keep saying the same thing over and over and over again. We
have to make sure that every s ingle of f icial who goes there says the same
thing over and over and over again.
If we have mixed pr ior i t i es and mixed s ignals , then i t ' s easy for them
to decide to l i s ten to the one who has put this a t the bot tom rather than the
three that put i t at the top.
Al l that said , l et me ask you about a d if ferent quest ion related to th is .
One of the big di fferences between then and now that you al luded to is the
arr ival of global value chains and global integrat ion of manufacturing and
services , for that mat ter , which was n ot characteris t ic of the '80s .
It seems to me that ' s an envi ronment of mutual dependence in the
manufacturing process . I don ' t disagree with you about China’s goals
al though I a lso think that Mr. Harris is r ight , there are d if ferent Chinese
that have d if ferent goals . Actual ly China does have a lot of economists ,
and they' re not s tupid economists . They are very smar t economists and they
understand the world the same way that our economist s do. They don ' t
make the decis ions in China.
But i t 's not that t hey' re not there . It ' s just that they' re not in charge.
I 'm incl ined to bel ieve the people in charge share the view that you
art iculated. That sa id, i f thei r goal is to essent ial l y cut us out of supply
chains , i f you wil l , why wouldn ' t American companie s , not unanimously a l l
at once, but why wouldn ' t American companies coping with that respond by
cut t ing China out of thei r supply chains and wouldn ' t that have a fai r l y
s ignif icant economic impact on them or are we too far down that road to
make that feas ible, in which case i f i t ' s not feasible for us , how is i t
feasible for them?
DR. ATKINSON: Well , I think the answer to that , Chai rman Reinsch,
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i s tha t they, you al lude to the fact in these negot iat ions , in these d ia logues,
the Chinese always speak with a s ingle voice, and that ' s been ful ly my
experience . U.S. doesn 't speak with a s ingle voice --and that ' s been my
experience as wel l .
I think the same thing i s t rue with thei r economy. They are able to
enforce discipl ine and so that thei r producers fol low the l ine rather than
lead the l ine . We can ' t and shouldn ' t enforce discipl ine in our economy that
way. We have a f ree market economy. Our companies can do and think
what they want .
Our companies can ' t ever and won ' t ever ful ly come to a sort of
coordinated act ion agreement to shut the Chinese out . I mean that ' s what i t
would take, and for no other reason that our companies are much more
dependent upon quarter ly returns and performing wel l for Wall S treet . You
fol low that s t rategy, and you 're going to see diminished re turns for f ive
years . You might in the long run , your net present value might be up , but
your returns in the short run.
So I just don ' t think U.S. companies have the ab i l i t y to coordinate or
the long-term abi l i ty to take the long - term in terest approach that they might
need to do.
CHAIRMAN REINSCH: I 'm more persuaded by the second part than
the f i rs t par t . I don ' t think they need to coordinate. What they need to do
is act in thei r interests , and you 're making a good case about why they
would perceive thei r interests di f ferent ly by focusing on long term rather
than short t e rm.
Mr. Harris , do you want to comment on thi s or not?
MR. HARRIS: Yes . When you ta lk about supply chains , that could
mean anything f rom cloth ing and shoes on up t o super high - technology
products , and when i t comes to th ings l ike c lothing and shoes , I don ' t think
that 's even real ly on the program here today because I don ' t think that the
issues that we 've ta lked about are real ly ter r ib ly relevant to indust r ies l ike
that .
CHAIRMAN REINSCH: I think we 're talk ing most ly about high -tech
sector .
MR. HARRIS: Okay.
CHAIRMAN REINSCH: Ref lect ing Mr. Atkinson 's expert i se.
MR. HARRIS: Okay. Yeah. Okay.
CHAIRMAN REINSCH: I 'm out of t ime.
HEARING CO-CHAIR SLANE: Thank you.
Mike.
COMMISSIONER WESSEL: Thank you, gent lemen.
I would argue, and l is ten careful ly here, Dennis - -
VICE CHAIRMAN SHEA: Okay.
COMMISSIONER WESSEL: Probably the s ingle best pres ident on
t rade was Ronald Reagan in the sense of making clear to the Japanese at
tha t t ime that whether i t was kei retsu or any of the o ther systemic
governmental bus iness approaches that they were engaged in that enough i s
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enough. America is going to s tand up and i s going to have a uni f ied voice .
When I look at our enforcement s t rategies here in the government , here
in our own government , and certain ly th is adminis t rat ion has done more on
a broad range of issues than any pr ior to i t other than Reagan and the way
he s tood up, but i t ' s far f rom enough, and we talked earl ier about , for
example, the indic tment against f ive PLA hackers las t yea r , and I have thi s
vis ion that those hackers despi te the fact that t hey' re not going to be able to
t ravel to the U.S. because they' l l be brought to just ice aren ' t t er r ibly
unhappy for the esteem they' re probably held in by their compatr iot s for
what a great job they did at t aking U.S. secre ts . And there 's been no
fol low-up act ion .
Yet when Sony is hacked, the President raises , you know, this is a
nat ional threat to our core interests , and whether i t ' s the U.S. or others who
took act ion against the North Koreans, tha t this was a serious i ssue .
You know, three years ago, the U.S. began a case on auto parts and
act iv i t i es of the Chinese . Three years la ter , we ' re s t i l l wai t ing to go to the
consul tat ion phase, and in our Annual Repor t l as t year , there was a char t of
the enforcement act ions that began against China but that ar e s t i l l wai t ing
resolut ion years later .
The Chinese are winning. I mean i f you measure i t f rom an economic
sense or indus tr ia l pol icy or almost any other sense, human r ights sense ,
they' re winning. We're not t aking them to courts . The ac t ivi t i es of man y of
our leaders years ago of bringing a let ter each year and saying, these people
need to be let out of prison, which achieved resu l ts , tha t 's l a rgely s topped.
We don ' t do the t rade cases . We say engagement , d ia logue is what we
should do . Isn ' t i t t ime to say that th is isn ' t working, and we have to - -
again, I rai sed the BIT earl ier --say no new agreements unt i l we get the
resul ts we expected from the previous ones, as wel l as a broad range of
enforcement ac t ions , to take that catalog which they publ ish ev ery year , the
Nat ional Trade Est imates report , clean the ca ta log out and say now we can
s tar t?
DR. ATKINSON: I think, as you know, a repor t tha t we did a few
years ago on China with the t i t le "Enough i s Enough," and I agree with you,
i t jus t doesn 't look l ike we 've seen systemic progress .
What we see is a l i t t le bi t o f progress when we push hard , and then i t ' s
a l i t t l e bi t l ike whack -a-mole or pushing down on a water bal loon. You
push down here and something el se comes up here.
I think your point on th e Sony case is exact ly the point I was making.
I think i t 's an impor tan t point . We made the Sony response , which , look, at
the end of the day I mean i t wasn 't good and al l that . But i t was a nuisance.
It was bad . It was embarrassment . It wasn 't l egal . It wasn ' t r igh t , but i t
fundamental ly was a nuisance as far as I could tel l . I don ' t know. Maybe
there 's other things going on . They d idn 't s teal core crown jewels of the
U.S . t echnology economy.
And yet we had a coherent top -level response from the adminis t rat ion,
argued on the basis of i t vio la ted our core principle , which was f reedom of
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speech.
I don ' t think that was -- in my view, the core principle should be our
long-term economic viabi l i t y as the global - leading innovat ion economy, and
so I think that jus t sends a message to the Chinese that we 'l l pu t al l men on
deck , al l things on deck i f you v iolate freedom of speech in the U.S. , but i f
you violate f reedom of proper ty, which the Chinese have done over and
over and over again , there 's no respons e.
So I ful ly agree with you that we need to have a fundamental ly new
st rategic approach that we don ' t have, and I think par t of the problem
frankly i s that many of the leading t rade think tanks in Washington don ' t
bel ieve that , and they' re much more orie nted to the v iew that we should
subjugate our economic interest s in China for global nat ional securi ty
interes ts , and, secondly, that China is eventual ly going to move in our
direct ion , and i t 's just a quest ion of convincing them and ta lking a l i t t l e bi t
more and a l i t t l e bi t louder .
How long are we going to do that before we rea l ize that jus t isn ' t
working? I mean maybe i t wi l l work. Maybe I 'm wrong, but I just don ' t see
any evidence of that so I would agree wi th you.
COMMISSIONER WESSEL: I real ly do appreciate your comments ,
and I noted when you f i rs t s tar ted or when I f i r s t commented about the
organizat ion you lead , you are a global thought leader . You 're looked to by
many. So your comments today are helpful . You know, i t was individual
companies in the 1980s . Today i t ' s rea l ly the indust ry t rade associat ions
that l ead because of fear of retal iat ion by individuals .
So thank you for what you 're doing. Keep i t up . Convince some of
your col league t rade associat ions that there needs to be a unif ie d voice, and
maybe we can have a uni f ied pol icy response as a resul t .
DR. ATKINSON: Thank you.
HEARING CO-CHAIR SLANE: Jef f .
COMMISSIONER FIEDLER: A quick quest ion on s tate en terprises - -
this is something I don ' t unders tand --as a sort of retal iatory o r l everage
poin t here. So the Chinese are essent ia l l y, among other things , t rying to
protect the ir nat ional champions , which are s tate enterpri ses . And we 're
l ike free market capi tal is ts . Maybe I 'm not exact ly, but --
[Laughter . ]
COMMISSIONER FIEDLER: --Americans are . Okay. Yet we are in
this sort of deadly embrace with, Chinese s tate enterpri ses , and every t ime
a person l ike me says why do we let s ta te enterprises come to the United
States and operate, no cost of capi tal , this , that , and the other t hing, and
we 're capi tal i s ts . I 'm real ly not - -or l et them go to the New York Stock
Exchange, rai se $3 bi l l ion so we enable i t a l i t t l e more, and then the
Chinese protect i t , and they bang our companies . I 'm miss ing something
about how to leverage power an d things that are important to the Chinese.
Any comment about reciproci ty here? And s tate enterprises general ly?
And re ta l iat ing against them?
DR. ATKINSON: Yeah, and I think -- I 'm sure you 've seen this
98
evidence, a t l east when we looked at i t , I think i t was the Unirule
Foundat ion or inst i tute in China that showed that the average ROI, ra te of
return--excuse me-- for Chinese s tate -owned enterprises was negat ive f ive
percent .
COMMISSIONER FIEDLER: Yeah, which means we can bury them. I
mean the ex is tence of them is not because they want to make money.
DR. ATKINSON: No, my point is i f we were compet ing against any
other count ry--
COMMISSIONER FIEDLER: Yeah.
DR. ATKINSON: - -any o ther company in the wor ld , and our
enterpri ses didn 't have to make 15 or 20--
COMMISSIONER FIEDLER: Right .
DR. ATKINSON: - - they could sel l at negat ive f ive --
COMMISSIONER FIEDLER: Right .
DR. ATKINSON: - -so you 're now talk ing about a 20, 25 percent - -
COMMISSIONER FIEDLER: Right .
DR. ATKINSON: - -price discount ther e .
COMMISSIONER FIEDLER: Right . Right .
DR. ATKINSON: That 's a huge subsidy. I think I would general ly
agree that we should have a d if ferent orientat ion for SOE investment in the
U.S . than we do for non -SOE investment . I do th ink there are legi t imate
Chinese companies that are non -SOEs that we have to t ry to bring into the
fold, i f you wi l l , because eventual ly, I think ac tual ly now, but increasingly
they can be an important counterforce against the Chinese pol icies ,
part icular ly around SOEs, because I think that ' s one dynamic that , i f I 'm
hopeful of any dynamic in China, i t ' s that the independent companies are ,
you know, when we vis i ted an independent company a few years ago there,
when i t was part of the Innovat ion Dialogue, this company was real ly,
rea l ly mad, real ly mad.
I mean i t was angry at s tate -owned enterpri ses because they had been
hurt ing them as an independent Chinese company, and I think this Chinese
company was in the auto part s sector , and they were a real company, they
had an owner, the y had capi ta l , they were t rying to do and win . So I think I
agree with you in general . I jus t th ink we shouldn 't be in a blanket al l
Chinese investment is bad. I think we need to be thinking about - -
COMMISSIONER FIEDLER: I didn 't say so . I didn ' t say so. That 's
not what I was proposing. So what would you do to the SOEs?
DR. ATKINSON: I hate to sound l ike I 'm copping out on th is .
[Laughter . ]
DR. ATKINSON: It ' s just not an area I have s tudied enough to know
exact ly what the r ight response is . One area we have wri t ten on, though,
and I know that people in the in te l l igence community or at least the defense
community are thinking about thi s , I th ink we need to reth ink CFIUS
seriously because the CFIUS regime is oriented to sort of one at a t ime.
Chinese acquis i t ions are not oriented to one at a t ime. They' re
oriented sys temical ly. So I do think that 's an area where we should see real
99
reform, and understand in the CFIUS process this is a broader s t rategy to
acquire technology for mil i t ary and na t ional secur i ty purposes . So that ' s an
area I would argue. On the SOE and what do you do , I 'm af raid I just don 't
know.
MR. HARRIS: I don 't know ei ther , but I ' l l p lay lawyer again and poin t
out that i t ' s of tent imes very di f f icul t to know what an SOE is , meaning
some people say SOE to describe a company that ' s le t 's say 49 percent
owned by the mayor of a town, and you get a lot of tha t in China, where
there wil l be a private business that i s owned by let ' s say the province 49
percent . So I think the tec hnical defini t ion is owned by Bei j ing.
COMMISSIONER FIEDLER: No. But I don ' t think that you have to be
so lawyer ly about i t . Okay. You can be arbi t rary about i t on some level ,
which is U.S. control l ing interests in a company, in a publ icly t raded
company, is f ive percent . That 's a r idiculously low amount on some level .
Al l r ight .
But , so , i f you say that accumulat ion of more than 50 percent of a
company is SOE-owned, okay, that ' s f ine. I mean there 's p lenty of t argets
is my poin t . Don ' t diminish t he targets .
MR. HARRIS: Wel l , I 'm not so sure there are .
COMMISSIONER FIEDLER: His problem --no , no. What I 'm more
concerned about is that Rob, as influent ial as he is , hasn ' t thought about i t ,
which means to me that the government and people around in the
community, I mean in the business community, have maybe al ready re jec ted
the not ion of re ta l ia t ing against SOEs. I mean that ' s what 's impor tant to the
Chinese--SOEs. I mean I know how to pick targets .
MR. HARRIS: Wel l , there actual ly is some case law on thi s that was
establ ished by one of the lawyers in my f i rm. A long t ime ago when China
Ocean Shipping t r ied to come in , f i rs t t r i ed to come into the Uni ted S ta tes ,
they had thei r asse t s seized by people who -- I may be get t ing some of the
fac ts wrong. I bel ieve seized by companies who had had thei r asse ts
seized--
COMMISSIONER FIEDLER: By Ocean Shipping.
MR. HARRIS: - -China and the court s held that even s tate -owned
enterpri ses i f they' r e opera t ing l ike a pr ivate business are not rea l ly the
government . So I think --
COMMISSIONER FIEDLER: Unless we pass di f ferent l aws deal ing
with SOEs.
MR. HARRIS: Wel l , I don ' t know. I think that ' s a very complica ted
path, and I 'm not sure there 's much return because I 'm not sure what SOEs
there are in the Uni ted States . I mean what you have are the SOEs tend to
be the big shipping companies or oi l companies , t ank companies , mining
companies . It ' s not the dynamic Chinese companies that people talk about ,
and then you 've got other companies that might , we migh t be suspicious
that they' re in l ine with the government , but they' re not necessari l y owned
by the government .
COMMISSIONER FIEDLER: Thank you.
100
HEARING CO-CHAIR SLANE: Wel l , we 've gone over our t ime. Dr .
Atkinson and Mr. Harri s , thank you so much. Yo u guys were terr i f ic , very,
very helpful , and we 'l l get ready for our next panel .
101
PANEL II INTRODUCTION BY CHAIRMAN WILLIAM A. REINSCH
CHAIRMAN REINSCH: I think we 're a lmost ready to get s tar ted . Do we
have our witnesses here? Good. I ' l l s tar t the int roduct ions. We're running
a l i t t l e bi t behind .
This next panel wil l focus on China 's Ant i -Monopoly Law. Three legal
expert s wil l di scuss the s t ructure and his tory of the law, assess the factors
affect ing China 's implementat ion and enforcement of i t s Ant i -Monopoly
Law, and put China ' s compet i t ion pol icies into global context .
Our f i rs t wi tness i s Tad Lipsky, and Mr. Lipsky, we appreciate your
f i l l ing in late in the day. Mr. Lipsky is a partner in the Washington, D.C.
of f ice of Latham & Watkins , wher e he focuses on U.S. and internat ional
ant i t rus t and compet i t ion pol icy mat ters . Having served as chief ant i t rust
lawyer for the Coca -Cola Company f rom 1992 to 2002, Mr. Lipsky has
ant i t rus t experience in the U.S . , EU, Canada, Japan , and o ther es tabl ished
ant i t rus t l aw regimes, as wel l as in new and emerging ant i t rust law regimes.
From 1981 to 1983, Mr. Lipsky served as Deputy Ass is tan t Attorney
General under Wil l iam F. Baxter , where he supervised Supreme Court
l i t igat ion in a series of groundbreaking ant i t rus t cases .
In 2010, Mr. Lipsky tes t i f ied on the impact of China 's ant i t rust law and
other compet i t ion pol icies on U.S. companies before the Subcommit tee on
Courts and Compet i t ion Pol icy of the House Judiciary Commit tee .
Our next wi tness is Dr . El izabe th Xiao-Ru Wang. Dr. Wang is a
principal a t Charles River Associates in Bos ton . Dr. Wang has ex tensive
experience working on ant i t rust mat ters with Chinese regula tors .
She has submit ted repor ts and presented economic analys is in f ront of
the Chinese agencies . In addi t ion, she has advised cl ients on merger
reviews, ant i t rust invest igat ions and pr ivate l i t iga t ion in China .
Dr . Wang has publ ished and spoken on various topics related to
Chinese AML enforcement , especial ly on the compet i t ive and economic
analys i s frameworks employed in China 's merger reviews.
Our f inal wi tness on thi s panel i s Wil l iam Kovacic. P rofessor Kovacic
is the Global Compet i t ion Professor of Law and Pol icy and the Director of
the Compet i t ion Law Center a t George Washington Univers i t y Law School --
the longes t t i t l e on the panel today.
Before joining the GW Law School , he served as the Federal Trade
Commission 's General Counsel f rom 2001 to 2004 and was a member of the
Commission f rom 2006 to 2011.
From 2008 to 2009, Professor Kova cic was the Chairman of the FTC,
and in 2011, he received the Commission 's Miles W. Ki rkpatr ick Award for
Li fet ime Achievement .
Before we s tar t , I would also l ike to point out that the Commission
received an addi t ional wri t ten s ta tement for th is panel f ro m Gil Kaplan,
who is a partner a t King & Spalding, on potent ia l U.S. l egis la t ive responses
to China 's misuse of i ts Ant i -Monopoly Law. Mr. Kaplan 's submission can
be found on the Commission 's web s i te .
102
Thank you a l l for being here. As we 've advised the other panel i s ts ,
please do your best to keep your oral s tatement with in seven minutes and
also, given our experience with the las t two panels , please do your best to
keep your answers to quest ions brief so that we can s tay wi thin our f ive -
minute l imi t for each commiss ioner and not run over t ime as we have on
every panel so far .
So with that , we 'l l s tar t . We'l l go in the order in which I int roduced
you beginning with Mr. Lipsky.
103
OPENING STATEMENT OF ABBOT (TAD) LIPSKY, JR.
PARTNER, LATHAM & WATKINS
MR. LIPSKY: Thank you, Mr. Chai rman.
When Lauren sent me this l i s t of 13 quest ions that I might cover as
part of the subject mat ter , I was kind of f labbergasted .
CHAIRMAN REINSCH: All in seven minutes .
MR. LIPSKY: You could wri te a book about each of them so in an
effor t to be brief , in summary, I ' l l jus t say the fol lowing:
China was a late ar r ival to the ant i t rust party. The United S tates was
pret ty much the only serious operator up through the 1970s , and then
because of the forces of European cohes ion and the col lapse of the Soviet
Union in 1991, the idea of market economics became qui te popular al l over
the world , and so we had this incredible surge in the enactment of new
ant i t rus t l aws and the enforcement of o ld ones.
That occurred roughly betwe en 1985 and let ' s say the year 2000, by
which t ime there were maybe a hundred jur isd ic t ions with act ively enforced
compet i t ion laws.
The Chinese law was under debate for about 15 years and f inal ly went
operat ional in 2008. The substance of the law i tse l f is modeled loosely on
the majori t y of o ther compet i t ion laws around the wor ld . It has the three
major features: prohibi t ions on rest r ict ive agreements; ant icompet i t ive
mergers; and abusive uni lateral conduct by dominant f i rms .
But in i ts enforcement m echanisms, i t has some very unique elements .
It has three enforcement agencies: one l imited to mergers; one l imited to
price-related ant icompet i t ive conduct ; and the o ther l imited to non -price-
related ant icompet i t ive conduct , something unique in a l l the w orld. And, of
course, the enforcement occurs in a legal envi ronment that has only di s tant
analogies in juri sdict ions that we would regard as within our own t radi t ion.
So there are a lot of ant i t rust laws around the world. And you can f ind
them anywhere . You can f ind them not only in the developed juri sdict ions
l ike the European Union , France, Germany, Canada, Mexico , and in the
"off -Broadway" juri sdict ions l ike Pakis tan , India, Cos ta Rica and Brazi l ,
but then there are even the "off -off-Broadway" juri sd ict ions l ike the Is le of
Jersey and Sri Lanka. These are al l places that now have ful ly -enforceable
systems of ant i t rust laws.
The divers i t y in the mechanisms by which these laws are adminis tered
and enforced is just s taggering, and the l is t i s growing. The Phi l ippines
r ight now are considering a piece of l egis lat ion that would give them a
more ful l - f ledged ant i t rust l aw.
So the problems that have ari sen in the Chinese context are not
necessari l y radical ly di f ferent f rom the problems that occur in other
jur isd ic t ions that are new to ant i t rust l aw and that do not have a kind of a
s t r ict and h ighly-developed legal cul ture the way, for example , the Uni ted
States and the United Kingdom do.
But they've got more of these problems, I think , because of the
104
dist inct ions and the lack of local famil iar i t y with not only the an t i t rust
t radi t ions but the t radi t ions of economic analys i s and the legal t radi t ions
that prevai l elsewhere are absent in China .
So i f I could just very quickly ident i fy some of the main cr i t ic isms of
the way that the Chinese ant i t rust regime has developed, top of the l is t
would be absence of what we would recognize as procedural r ights in other
systems of law, the r ight to counsel , the r ight to learn of the ev idence and
arguments that are being posed against the target of an ant i t rus t proceeding,
and indeed the r ight to present a defense without fear of retal iat ion f rom
government agencies .
Part icular concerns have ar isen wi th regard to the appl icat ion of Ant i -
Monopoly Law in the f ield of intel lectual property. There have been
concerns that the Anti -Monopoly Law i s being appl ied in ways that are less
grounded on sound economic principles and sound implementa t ion of
compet i t ion pol icy to promote innovat ion and more of the nature of
favoring whatever Chinese par ty happens to be in play in terms of access to
foreign sources of t echnology and in te l lectual proper ty and so on .
There are al so some art iculated concerns about the use by the Chinese
of indus tr ia l pol icy and o ther non -compet i t ion factors in the appl icat ion of
the ir Ant i -Monopoly Law, a l l of which I think, reduced to thei r essent ia ls ,
have more than a grain of val id i ty. It ' s a long l is t o f grievances , but I th ink
I can be most useful by t rying to put thi s in a broader context .
I’m refer r ing to the fac t tha t ant i t rus t l aw wherever i t occurs has th is
annoying tendency to cont inuously grow and i t needs weeding and pruning
from t ime to t ime. In the United States , when I entered law school in 1973,
almost everyth ing was per se i l l egal under U. S. ant i t rust l aw: joint
ventures; hor izontal mergers ; act ions by monopoly f i rms, even i f they
tended to increase compet i t ion and innovat ion . Al l vert ical res t raints were
per se i l legal . It was a very harsh environment .
Over the course of the ten years , say f rom about 1973 to 1983, that was
fortunately reversed . Now how did that happen? It happened through a
combinat ion of very good scholarship being publ ished, i t happened through
innovat ions in our courts , who are the u l t imate arbi ters of the meaning of
our ant i t rus t l aws, and ul t imate ly i t happened when the ant i t rust agencies
were populated with off icia ls who recognized that an t i t rus t is best based on
sound compet i t ion analys i s and cannot be approached in a legal is t ic way.
But i t took an epochal change in the ant i t rust principles of the United
States to bring about that change. If you look at almost any other
jur isd ic t ion around the world , and I would include s t i l l our own jurisdict ion
in this , but i f you look at Europe or Japan or Korea or Canada or v i r tual ly
any o ther , there is a kind of a problem that there are no se lf -correct ing
mechanisms in the ant i t rust enforcement envi ronment , and one of the
reasons that progress in these various areas has been so s low i s tha t most of
the dialogue occurs with in the purv iew of the government ant i t rust
enforcement agencies , which are not in the bus iness of cr i t iciz ing each
other for the ex tent of the powers that they can exerci se and the remedies
105
tha t they can impose for ant i t rust vio la t ions .
It ' s just not part of the communi ty. As we th ink about how we can
reform these aspects of the Chinese enforcement regime that af fec t the
United States and American companies and world commerce, in general , we
should t ry to think of i t asone instance of a broader problem wi th a l l of
these new ant i t rust regimes that have emerged around the world and to some
extent that s t i l l apply to our own ant i t rust l aws.
I be t ter s top there . Thank you.
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OPENING STATEMENT OF ELIZABETH XIAO-RU WANG, PH.D.
PRINCIPAL, CHARLES RIVER ASSOCIATES
DR. WANG: Mr. Chai rman and members of the Commission, thank you for
invi t ing me to par t icipate in th is hearing.
My name is El izabeth Wang. I am a compet i t ion economist at Charles
River Associates , a global consul t ing f i rm special iz ing in l i t igat ion,
regula tory, and f inancial consul t ing. My test imony today reflec ts my
knowledge of China 's an t i t rust enforcement from my exper ience as an
economic consul tant .
I ' l l s tar t my remarks with a brief background on China 's Ant i -
Monopoly Law to provid e a general context to help understand some
characteri s t ics of the China AML enforcement .
Fi rs t , China is in the process of t ransi t ioning f rom a p lanned economy
to the market economy. Whi le economic reform and pr ivat izat ion have
changed the economic land scape, i t has taken some t ime for the
pol icymakers and even business people to adopt a ful l market economy
mind-set or for price s ignals to al locate resources .
Second, China i s at an early s tage in implement ing the AML. Ant i t rust
law i s complex , evolving , and constant ly presents new chal lenges. China 's
AML enforcement teams are resource const rained and are in the process of
developing inst i tut ional knowledge and gaining case experience.
Next , I wi l l p rovide an overview of China 's AML enforcement . China
has three agencies enforcing di f ferent areas of AML. They were al l
es tabl ished s ix years ago around the t ime when AML went into effect in
August 2008.
The Ant i -Monopoly Bureau within the Minis t ry of Commerce, known
as MOFCOM, handles merger review. Fro m August of 2008 through the end
of 2014, MOFCOM reviewed 1,006 proposed mergers and acquis i t ions .
The agency approved 980 t ransact ions without condi t ions. That is 97.4
percent of al l the cases reviewed. Rejected two t ransact ions out r ight and
approved 24 with condi t ions. Studies indicate that a l arge major i t y of the
t ransact ions reviewed by MOFCOM involved fore ign companies . MOFCOM
has recognized the i ssue of underreported t ransact ions and has taken s teps
to punish companies who fai l to not i fy.
Two agencies in China handle adminis t rat ive invest igat ions into
al leged AML violat ions related to monopol i s t ic conduct . The Pr ice
Supervis ion and Ant i -Monopoly Bureau with in the Nat ional Development
and Reform Commission , the NDRC, is respons ible for enforcemen t agains t
price-related monopol is t ic conduct whi le the Ant i -Monopoly and Anti -
Unfai r Compet i t ion Bureau within the S tate Adminis t rat ion for Indust ry and
Commerce , the SAIC, i s respons ible for the enforcement against non -price-
related monopol is t ic conduct .
To date, the adminis t rat ive inves t igat ions have focused on car te ls ,
vert ical agreements , and abuse of dominance mat ters . Inves t igat ions
ini t i ated by the NDRC account for a majori t y of those act ions . Based on
107
the s tat is t i cs provided by the two agencies , t en percent of the ent i t ies
invest igated by the NDRC and f ive percent of the cases invest igated by the
SAIC involved fore ign f i rms .
These f igures by themselves do not suggest a conclus ion that there has
been a sys temat ic target ing of foreign companies in AML invest igat ions .
However , more data and more complete analyses are needed before any
defini t ive conclusion can be drawn whether foreign f i rms pay
systemat ical ly di fferent f ines than Chinese f i rms while cont rol l ing for other
relevant economic factors .
In principle, the AML al lows the s ta te and the AML enforcement
agencies to take in to account fac tors beyond the t radi t ional ant i t rust
considerat ions. However , i t i s unclear at thi s s tage whether non -t radi t ional
compet i t ion factors have ac tual ly af fected A ML enforcement decis ions, and,
i f so , exact ly which factors played a role and in which cases , to what ex tent
such non- tradi t ional compet i t ion fac tors influenced the case outcome, and
whether China appl ies a di f ferent s tandard in considering those fac tors
when analyzing pure domest ic conduct versus conduct involving foreign
f i rms .
One key chal lenge to understanding this ef fect is the lack of suff icient
t ransparency in reasoning and fact -f inding behind some enforcement
decis ions.
In conclusion, China 's AML regime features new agencies car rying a
heavy caseload involving complex ant i t rust issues within a changing
economic and legal framework . This is due to , a t l east in part , China 's
la rge, divers i f ied and dynamic economy.
These factors combined magni fy the di f f icul t ies and chal lenges the
AML enforcers face . News coverage has provided anecdotes of foreign
companies frust rated with China 's AML enforcement . My understanding i s
tha t a good amount of the f rust ra t ion i s due to growing pains associa ted
with the ea rly s tage of a developing ant i t rust regime in China 's
t rans i t ioning economy.
I would recommend the fol lowing ef for t s : f i rs t , engaging detai led
dia logue on China 's AML agencies ' decis ion -making; second, encouraging
more t ransparency through disclosure of e conomic analys is and fact -
f inding; las t , helping AML regulators focus on compet i t ion analys is .
Thank you.
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PREPARED STATEMENT OF ELIZABETH XIAO-RU WANG, PH.D.
PRINCIPAL, CHARLES RIVER ASSOCIATES
Testimony before the United States China Economic and Security Review Commission
Hearing on: “The Foreign Investment Climate in China”
by
Elizabeth Xiao-Ru Wang, PhD1
Principal, Charles River Associates
Regarding the Legal and Regulatory Context for China’s Antitrust Enforcement
January 28, 2015
Mr. Chairman and members of the Commission, thank you for inviting me to participate in this
hearing. My name is Elizabeth Wang. I am a competition economist based in Boston at Charles
River Associates, a global consulting firm specializing in litigation, regulatory, and financial
consulting. I am a Co-Chair of the China Committee and a Vice Chair of the International
Antitrust Committee of the International Law Section of the American Bar Association. I am
also a Senior Research Fellow and Economist at the Competition Law Centre, University of
International Business and Economics, in Beijing, China. I was born and raised in China, and I
received my PhD in economics from the University of Chicago. I have 15 years of experience
consulting on antitrust matters both in the US and in China. With regard to my work related to
China, I advise clients on merger reviews, antitrust investigations, and private litigation. I also
frequently meet with Chinese regulators and economists at conferences and through my case
work. My testimony today reflects my knowledge of China’s antitrust enforcement from my
experience as an economic consultant.
Background on China’s Anti-Monopoly Law and its Enforcement Agencies
I will start my remarks with a brief background on China’s Anti-Monopoly Law (AML) and its
enforcement agencies to provide a general context to help understand some of the characteristics
of China’s enforcement of the AML.
General Context
First, China is in the process of transitioning from a planned economy to a market economy. It
does not yet have the same type of open and mature market economy as that in the US, Europe,
Japan, and many other developed countries. Many companies are state owned. Certain others,
while private, lack the full autonomy to make key business decisions such as setting prices,
developing new product lines, and selecting the company’s management.2 While economic
reform and privatization have changed the economic landscape, it is taking some time for policy
makers and even business people to adopt a full market economy mind-set, or for market price
signals to allocate resources. These are key steps to developing a free and open marketplace.
Second, China is still at an early stage in implementing the AML. Antitrust law is complex, 1 The views expressed herein are the views and opinions of my own and do not necessarily reflect or represent the
views of Charles River Associates, or any of the organizations with which I am affiliated. 2 For more discussion about China's transition from a planned to market economy, see Greg C. Chow,
“Development of a more market-oriented economy in China,” Science, vol. 235, January 16, 1987, pp. 295-299.
109
evolving, and constantly presents new challenges. Antitrust law has 125 years of history in the
United States. Experience has taught antitrust practitioners that competition analysis often
requires a fact-intensive, case-by-case assessment, guided by economic principles and backed by
empirical analysis. Since China’s AML went into effect six years ago, the agencies in charge of
enforcing the AML have made efforts to raise the awareness of the AML with key stakeholders,
such as consumers, government administrative bodies, courts, and business communities in
China and abroad. Nonetheless, China’s AML enforcement teams are resource constrained, and
they are still in the process of developing institutional knowledge and gaining practical case
experience working with, and applying, economic models of competition and empirical
techniques. The AML agencies are new and have been operating with a relatively small group of
regulators and antitrust practitioners. It is my understanding that the three AML agencies
combined have fewer than a dozen PhD economists. By comparison, the Antitrust Division of
the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) together employ
well over 100 PhD economists.
AML Enforcement Agencies – Resources and Roles
China has three agencies charged with the responsibility of enforcing different areas of the AML.
The AML bureaus were established around the time when the AML became effective in August
2008.
• The Anti-Monopoly Bureau is within the Ministry of Commerce (MOFCOM).
MOFCOM is a large ministry whose primary responsibility is to grow China’s
international trade and foreign investment. The Anti-Monopoly Bureau is responsible
for antitrust review of proposed mergers and acquisitions. It is one of 31 bureaus in
MOFCOM. Currently, the Anti-Monopoly Bureau has 30 to 40 staff members,
roughly half of whom are involved in case handling. Only three of its staff members
have PhDs in economics.3
• The Price Supervision and Anti-Monopoly Bureau is part of the National
Development and Reform Commission (NDRC). The NDRC’s primary responsibility
is to develop plans for China’s economic and social development, such as energy
policy, the balance of economic activity across China’s geographic regions, and
pricing regulations. The Price Supervision and Anti-Monopoly Bureau is one of 33
bureaus within the NDRC. It is responsible for the enforcement of prohibitions
against price-related monopolistic conduct under the AML. The Bureau’s antitrust
enforcement team currently has over 40 staff members, five or six of whom have
PhDs in economics.
• The Anti-Monopoly and Anti-Unfair Competition Bureau is part of the State
Administration for Industry and Commerce (SAIC). The SAIC has the primary
responsibility for market supervision and regulation including consumer protection,
trademark registration, and enterprise registration. The Anti-Monopoly and Anti-
Unfair Competition Bureau is one of 15 bureaus within the SAIC. It is responsible for
the enforcement of prohibitions against non-price-related monopolistic conduct under
3 There is no publicly available information on staffing levels at the three AML agencies. The information provided
here is based on personal observation.
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the AML. The Bureau’s antitrust enforcement team currently has approximately 15 to
20 staff members, one or two of whom has a PhD in economics.
The NDRC and SAIC also have regional offices involved in AML investigations. However, high
profile cases are handled by the central office which provides guidance and direction for local
enforcement.
Enforcement of AML
There have been many AML enforcement actions since 2008. I will provide an overview of these
merger reviews and administrative enforcement actions, with a particular focus on foreign firms
in the context of case selection and outcome.
Merger Review
Like US antitrust law, the AML requires that all mergers and acquisitions meeting certain
thresholds obtain antitrust clearance with MOFCOM before a transaction can be consummated.4
From August 2008 through the end of 2014, MOFCOM reviewed 1,006 proposed mergers and
acquisitions. The agency approved 980 transactions (97.4% of total reviewed) without
conditions, rejected two proposed transactions outright, and approved 24 transactions with
conditions.5
Two publicly available studies indicate that a large majority of transactions reviewed by
MOFCOM involve foreign companies. One study shows that from August 2008 to June 2013,
82% of acquisitions and 90% of non-acquisitions (mostly joint ventures) reviewed by MOFCOM
involved at least one foreign company.6 The other study shows that from August 2008 through
the first quarter of 2014, 92.4% of transactions reviewed by MOFCOM involved at least one
foreign company.7
These statistics do not include all the transactions that should be filed for the AML review.
MOFCOM has recognized the issue of under-reported (particularly domestic) transactions8 and
has taken steps to punish companies who fail to notify the agency of transactions meeting
reporting thresholds. On December 2, 2014, MOFCOM imposed its first fine of RMB 300,000
(approximately USD 48,000) on Tsinghua Unigroup for failure to notify its acquisition of RDA
Microelectronics in 2013, an acquisition involving two Chinese companies.9
As previously noted, 97.4% of the transactions reviewed by MOFCOM have been cleared
without conditions. This is comparable to similar statistics in the US and EU. In the 26 cases
4 These thresholds are: each of at least two business operators must have sales in China in excess of RMB 400
million (USD 65 million), and the combined sales of all the business operators must exceed (i) RMB 10 billion
(USD 1.6 billion) on a worldwide basis; or (ii) RMB 2 billion (USD 325 million) in China. These thresholds are
lower than those required in the EU. The US Hart-Scott-Rodino filing uses a different approach so it is difficult to
make an apples-to-apples comparison. 5 MOFCOM statistics about transactions cleared without conditions and MOFCOM’s announcements about
transactions with intervention are available on the MOFCOM website. The information is in Chinese. 6 Fei Deng and Cunzhen Huang, “A Five Year Review of Merger Enforcement in China,” The Antitrust Source,
chart 3, October 2013. 7 Lester Ross and Kenneth Zhou, “MOFCOM to Publicize Administrative Penalties for Illegal Implementation of
Concentrations,” WilmerHale, April 21, 2014. 8 MOFCOM press release, January 10, 2012 (in Chinese). MOFCOM’s press conference regarding draft regulations
on the investigation and treatment of failure to report concentration. 9 MOFCOM Administrative Penalty Announcement No. [2014] 788, December 8, 2014 (in Chinese).
111
where MOFCOM intervened, none were purely domestic transactions (that is, involving two
Chinese companies) though five involved at least one Chinese party, and the remaining 21
involved solely foreign firms. MOFCOM reports its economic findings and competition concerns
for each of the transactions in which it intervenes. These announcements over time have
provided increasing detail and evidence of growing sophistication. The business and antitrust
communities could further benefit from announcements that provide more detailed reasoning and
fuller descriptions of the supporting evidence behind MOFCOM’s decisions.
Administrative Investigations of Monopolistic Conduct
To date, investigations initiated by the NDRC account for a majority of China’s administrative
investigations into alleged AML violations related to monopolistic conduct. The investigations
have focused on price fixing agreements, retail price maintenance agreements, and abuse of
dominance matters alleging excessive prices. While excessive pricing is not an antitrust concern
under US law, it is included as a concern in the AML. Based on the statistics provided by the
Director General of the Price Supervision and Anti-Monopoly Bureau of NDRC, between
August 2008 and the summer of 2014, the NDRC and its local branches investigated 339 entities.
Of these entities, 33 (10%) were foreign or foreign-controlled companies. The rest (90%) were
state-owned enterprises, private domestic firms, and industry associations.10
The NDRC has not disclosed information on all of the penalties it has imposed as a result of
AML violations. While the NDRC often imposes multiple types of penalties for a given
violation,11 fines expressed as a percentage of an entity’s yearly revenue in China is a measure
that may be used to compare the size of penalties across different companies. The NDRC website
reports that information for 70 entities (including 50 Chinese entities and 20 foreign entities) in a
number of industries such as insurance, travel agencies, auto parts, and retail. These data indicate
that the average fine percentage imposed was roughly 2.2% of annual revenues for Chinese
entities, and 4.0% for foreign entities.12 More data and more complete analyses are needed
before any definitive conclusions can be drawn as to whether foreign firms pay systematically
different fines than Chinese firms, while controlling for other relevant economic factors.
From August 2008 to the end of 2014, the SAIC and its local branches investigated 43 cases of
alleged AML violations, concluded 19 investigations, and suspended one investigation. Two
investigations (5%) involved foreign-invested companies, while the remaining 41 cases involved
Chinese firms or industry associations. 13 To date, SAIC investigations have focused on cartel
agreements (e.g. market division) and abuse of dominance conduct (e.g. bundling). The SAIC
imposed fines totaling RMB 19.7 million in 2013 and 2014 combined, all of which were on
10 “Foreign companies are a minority among targets of Chinese antitrust regulators, senior official says,” MLex,
December 8, 2014. 11 For example, in NDRC’s investigation of LCD price fixing, the penalties imposed on the six LCD suppliers
include restitution in the amount of their illegitimate profit from the sale of LCDs in China, and commitment to
abide by China’s laws, engage in fair competition and extend the warranties on LCD products, in addition to paying
fines based on their revenues. 12 NDRC penalty information collected from penalty announcements on NDRC website (in Chinese). I
supplemented NDRC’s announcements with general internet searches for information about several high profile
investigations and about specific fine amounts. 13 “China’s SAIC, local agencies initiated 13 new antitrust investigations in 2014, official says,” MLex, December 8,
2014.
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Chinese firms.14 Both of the SAIC investigations involving foreign companies are ongoing as of
this testimony.
Based on the statistics provided by the two agencies, 10% of the entities investigated by the
NDRC and 5% of the cases investigated by the SAIC involved foreign firms. These figures by
themselves do not suggest a conclusion that there has been a systematic targeting of foreign
firms in administrative AML investigations. However, there is insufficient data to allow us to
conclude whether fines imposed on foreign firms are systematically different than those imposed
on Chinese firms when fines are imposed, after controlling for other relevant factors.
Non-traditional Considerations in AML Enforcement
In principle, the AML allows the state and the AML enforcement agencies to take into account
factors beyond traditional antitrust considerations in AML enforcement. Article 27.5 of the AML
states that “the development of [China’s] national economy” shall be considered as one of the
factors in China’s merger review. A broad reading of Article 4 (“The State will formulate and
implement competition rules compatible with the socialist market economy, perfect
macroeconomic control and develop a sound uniform, open, competitive and orderly market
system.”) could allow the NDRC and the SAIC to take into account factors beyond traditional
competition issues in their AML investigations.
In addition, the institutional context of the three AML enforcement agencies might allow their
respective “supervising” ministries, which have a wide range of administrative functions, to
influence AML enforcement. The personnel of each AML enforcement bureau are appointed by
their respective ministry. In principle, the ministry leadership approves the final decision in
major AML cases. Therefore, ministry goals beyond AML goals could possibly influence AML
enforcement through various means.
It is unclear at this stage whether non-traditional competition factors have actually affected AML
enforcement decisions; and if so, exactly which factors played a role in which cases, to what
extent such non-traditional competition factors influenced the case outcome, and whether China
applies a different standard in considering those factors when analyzing purely domestic conduct
versus conduct involving foreign firms. One key challenge to understanding this effect is the lack
of sufficient transparency in reasoning and fact finding behind some enforcement decisions.
Information on AML agencies’ decisions is scarce. When the information is made available, it is
often brief and offers limited insight into the agencies’ thinking process, especially for complex
antitrust matters not involving cartels.
The agencies often have access to information (sometimes confidential information) that they
cannot and do not make available to the parties involved or to the general public. For example,
MOFCOM often seeks and receives information from stakeholders such as trade associations and
customers. As a result, it is difficult to unravel the boundaries of competition concerns and to
refute suspicion that non-traditional competition factors might affect AML enforcement
decisions. Regular dialogue with the case teams and parties involved, with an emphasis on fact
finding and economic analysis of the information provided, could lead to a greater understanding
of how non-traditional competition factors, if any, are considered in AML enforcement.
14 “Comment: SAIC ends 2014 with record fines of 14.5 million yuan, seen active in 2015,” MLex, January 7, 2015.
113
Conclusion
China’s AML regime features new agencies carrying a heavy case load involving complex
antitrust issues within a changing economic and legal framework, due to, at least in part, China’s
large, diversified, and dynamic economy. These factors combined magnify the difficulties and
challenges the AML enforcers face. News coverage has provided anecdotes of foreign
companies frustrated with China’s AML enforcement. My understanding is that a good amount
of the frustration is due to growing pains associated with the early stages of a developing
antitrust regime in China’s transitioning economy. Working with Chinese AML agencies to help
them move along the learning curve expeditiously will be useful in overcoming these effects.
Future efforts could include engaging in detailed dialogue on the agencies’ decision-making,
encouraging more transparency through disclosure of economic analysis and fact finding, and
helping regulators focus on competition analysis.
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OPENING STATEMENT OF WILLIAM KOVACIC
GLOBAL COMPETITION PROFESSOR OF LAW AND POLICY
DIRECTOR, COMPETITION LAW CENTER, GEORGE WASHINGTON
UNIVERSITY LAW SCHOOL
MR. KOVACIC: Thank you, Mr. Chairman, and I express my grat i tude to
the Commission and to the professional s taf f for the opportuni ty to appear
before you today and discuss the development of compet i t ion pol icy in
China.
Like Tad, I 'd l ike to provide some context in which to understand the
development of China 's ins t i tu t ions and to examine China by reference to
other nat ions that have developed compet i t ion sys tems.
In a univers i t y, t yp ical ly you grade s tudents on a curve so a relevant
quest ion is compared to whom is China doing a good job or n ot? As Tad
ment ioned, a s t r iking feature of pol icymaking in the modern world has been
the emergence of many compet i t ion sys tems. In 1990, there were fewer
than 15 . Over 125 juri sdict ions today have compet i t ion law sys tems.
We've learned a number of thin gs f rom this experience . Fi rs t , nobody
gets i t r ight on the f i rs t day, and that goes back to the la te 19th century
with the f i rs t experiment in Canada in 1889 and certainly in the United
States in 1890. If you had measured the performance of the U.S . sys tem ten
years into that performance, you would have graded i t very badly. It was
not an immediate success . Arguably i t took a ful l hal f -century for the
system to be set on a sound foundat ion and, as Tad sa id, a much longer
evolut ion to develop doctr ines that we regard now as being sens ible
compet i t ion pol icy.
The second general observat ion is that good sys tems over t ime need
upgrades . That i s , i t i s somewhat less important where precisely you s tar t .
It i s vi tal how often you go back to your sys tem and evaluate performance
in l ight of past experience. And China, as El izabeth sa id , i s in the various
ear l ies t s tages of i ts l i fe cycle, bu t s ix years into the development of a
system is a very good t ime for China to look back and say how are we doing
and are there areas in which we could get improvements?
None of us use the word -processing package that was des igned in the
mid-1990s. Nobody in compet i t ion law should be content with a sys tem
that i s not upgraded rout inely.
I 'd say there are three basic foc al points for reconsiderat ion for China
going ahead, and in my own work in China , I sense a wi l l ingness to rev is i t
the framework and operat ion of the sys tem in these three d imensions .
Fi rs t , s t ructural s impli f ica t ions. Tad has described for you the
ex traordinary degree to which at the nat ional l evel China has decent ral ized
the decis ion to prosecute. It i s perhaps odd enough that the Uni ted S ta tes
s tands out as the only Western jurisdict ion wi th two federa l compet i t ion
agencies with overlapping authori ty. As Tad said, China has three.
I think there is a broad and growing understanding that three i s a
crowd, that three great ly complicates ef forts to develop pol icy coherence.
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One thing I would predict in the coming years is a reconsidera t ion of that
basic framework and a debate with in China about how to achieve greater
coherence f rom going f rom three to one.
Moreover, one could take the compet i t ion au thori t i es out of their
ex is t ing f ramework and to set them in a new inst i tut ion that would be a
s tand-alone agency. As you know, the three Chinese agencies have
compet i t ion uni ts that are t iny off ices in broad, sprawling pol icy
conglomerates -- smal l un i ts on the organizat ion chart that are dwarfed by
much larger ins t i tu t ions .
A point for debate that I would ant icipate in the fu ture i s whether to
take those inst i tut ions as part of the s impli f ica t ion out of thei r ex is t ing
homes and s i tuate them in a s tand -alone compet i t ion agency. This wi l l
have the ef fect ( i f i t takes place) of giving them greater au tonomy. The l i fe
cycle we have observed with many o ther ins t i tu t ions is that in the earl ies t
s tages , the government , especial ly in a t ransi t ion envi ronment that has
fea tured central planning and heavy rel iance on the s tate as the owner of
business enterprises , a t rend we 've seen that in the early s tage , the
government does not t rus t this new inst i tut ion so i t t ends to s i tuate i t in a
place that ' s closer to , more respons ive to the preferences of pol i t i cal
leadership .
The evolu t ion we see over t ime in many countr i es i s to move those
inst i tut ions far ther away f rom pol i t i cal cont rol of this kind , to give them
more autonomy to take decis ions in the manner that both El izabeth and Tad
were suggest ing are par t of the evolut ion of compet i t ion sys tems.
So one thing we might ant icipate on s t ructure is s impli f icat ion of the
system, reducing the number of nat ional part icipants but al so a
reposi t ioning of the ins t i tu t ions and perhaps a s tand -alone body that only
does compet i t ion law.
Second, procedural change. Tad has ident i f ied a number of concerns
that have ar isen wi th process in China , and here I would an t icipate, to
underscore a point that El izabeth made, a greater emphasis over t ime on
more di sc losure .
New compet i t ion agencies do not natura l ly take to the idea of
disclosing more informat ion about what they do, and when you 're operat ing
in a nat ional envi ronment in which there i s no his tory of broad d isclosure,
no his tory or custom for adminis t rat ive bodies to say a great deal about
what they do, the in troduct ion of the A nti -Monopoly Law in China , which
has a mandate for certain forms of d isc losure, is a real novel ty in publ ic
adminis t ra t ion.
I think we have seen, for example , in the work of the merger cont rol
uni t in MOFCOM much greater d isclosure over t ime s imply in s ix years
from saying very l i t t le a t the beginning to saying much more now.
I was a junior case handler at the FTC when the FTC's mandatory
merger not i f icat ion Regime went l ive in 1979, and I remember qui te keenly
that the response of the agency to ques t ions about the inevi tab le
ambigui t ies in the regulatory mechanism was to say “Read the regulat ion
116
again.” Companies would say ”Can you give us more guidance than th is? ,”
and the answer was “Read i t again.” The companies said “We've read i t
several t imes .”
I t was not unt i l many years la ter that there was a habi t o f g iving advice
over the telephone, issu ing f requent ly asked ques t ions, giving speeches at
which off icials would rout inely appear . This is a s low growth , and I would
ant ic ipate we would see more of the heal thy disc losure that both Tad and
El izabeth have refer red to over t ime.
Las t point , human resources . E l izabeth refer red to thi s , and I
underscore i t . China 's ant i -monopoly regime gave t iny off ices massive
respons ibi l i t i es . There was a severe und erstaf f ing that has had the
fol lowing effects : delays in processing informat ion; less at tent ion to
t ransparency. You spend less t ime explain ing what you 're doing i f you ' re
t rying to f ight the next f i re that ' s coming your way. And las t , less good
process . If you have too few people to do proper inves t igat ions , to do a
thorough examinat ion, to engage in a ful ler di scussion with outs ide part ies ,
you ' re incl ined to take shortcuts to get things done quickly.
I think a major need for the Chinese agencies , rea l ized in China, is to
develop ful ler resourcing, bet ter s taf f ing in order to address these concerns .
I look forward to your quest ions .
CHAIRMAN REINSCH: Thank you. Thanks to al l o f you for pret ty
much s taying wi thin the t ime l imits .
Commissioner Wessel .
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PREPARED STATEMENT OF WILLIAM KOVACIC
GLOBAL COMPETITION PROFESSOR OF LAW AND POLICY
DIRECTOR, COMPETITION LAW CENTER, GEORGE WASHINGTON
UNIVERSITY LAW SCHOOL
Hearing on the Foreign Investment Climate in China: Present Challenges and Potential for
Reform
Testimony of William E. Kovacic1
U.S.-China Economic and Security Review Commission
Washington, D.C.
January 28, 2015
Introduction: China’s Antitrust Experience in Context
In any country, the introduction of a system of competition law is a difficult, time- consuming
endeavor. No nation gets it right in the first year, or even the first decade. In the United
States, for example, it took roughly a half-century (from 1890 to 1940) for the country to
settle upon competition as the core principle for economic organization and to give antitrust
enforcement a central role in making markets work for consumers.2 Modern U.S. antitrust
experience has featured important changes in the legislative framework, doctrine, and
enforcement policy. The process of building an effective competition law system is an
ongoing process of experimentation, assessment, and refinement.3
The challenge of creating an effective competition law system is still greater in countries,
such as China, which have adopted competition laws to facilitate the transition from reliance
on central planning and state ownership toward a market-based economic regime in which
the private sector assumes greater responsibility for the production of goods and services.4
Three basic obstacles have confronted the implementation of China’s Antimonopoly Law
(AML), which took effect in August 2008. The first is to build awareness of the competition
law and to gain acceptance for market-based competition as the foundation for good
economic performance. This is an especially daunting task where powerful interests within
and outside the government regard competition with suspicion and desire to protect economic
structures established during the era of planning and comprehensive state ownership.
1 Global Competition Professor of Law and Policy, George Washington University Law School, and Non-Executive
Director of the United Kingdom Competition and Markets Authority. The views expressed here are those of the
witness alone. 2 This history is recounted in William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Economic and Legal
Thinking, 14 Journal of Economic Perspectives 43 (2000). 3 This cycle is analyzed in William E. Kovacic, Achieving Better Practices in the Design of Competition Policy
Institutions, 20 Antitrust Bulletin 511 (Fall 2005). 4 The difficulties of creating a competition policy system in formerly planned economies are examined in William
E. Kovacic, Institutional Foundations for Economic Legal Reform: The Case of Competition Policy and Antitrust
Enforcement, 77 Chicago-Kent Law Review 265 (2001).
118
Competition creates considerable benefits for society, but it also disrupts. Competition can
dramatically alter the fortunes of individual firms and the communities in which they reside. A
competition agency in any country must persuade government policy makers and the larger
society of the benefits of the continuous process of competition-driven industry transformation,
and it must discourage reliance on economic policies that would freeze in place an existing
configuration of products and services and the firms that supply them.
A second formidable endeavor is to establish effective institutions to implement the law.5
Among other measures, this requires the formation of new entities to enforce the competition
law and the establishment of capacity within existing bodies (e.g., the courts) to carry out duties
related to the new law. Good performance by these bodies, in turn, requires the development of
a strong supporting intellectual infrastructure – including the establishment of university
departments that teach courses in economics, business, law, and public administration relevant
to competition policy. No jurisdiction can succeed in implementing a competition law without
the contributions of these and other collateral institutions.
A third necessary measure is to establish a culture of public administration that emphasizes
informative disclosure of decisions taken by the competition agency and the reasons for the
agency’s actions. This is not a natural or welcome step within a bureaucratic tradition that has
no custom of explaining administrative decisions or making public officials available for
routine discussions of agency policy in settings such as conferences convened by professional
societies. Approximately 125 jurisdictions have created systems of competition law. Some of
these systems (e.g., Canada and the United States) were formed in the late 19th century. Most
systems are relatively new. All but roughly twenty of the existing competition law systems
have been formed since 1990. No two of the jurisdictions to enact competition laws are
identical. Variations in cultural, economic, historical, legal, and political circumstances
abound. Despite these differences, it is possible to derive at least two generally applicable
principles from experience with competition law.
First, the construction of an effective competition law system takes considerable time.
Accomplishment of the tasks identified above can be, and often is, a long journey. It can
easily require decades to set the foundations of the implementing institutions soundly in place
and to establish the capacity of the new enforcement agencies to apply the law in an effective
manner. It is important to keep in mind that China is still in the earliest stages of developing
its competition law system.
China has made considerable progress in a relatively short time to implement its law, yet
considerable work remains to be done.
The second proposition is that successful competition systems require periodic upgrades.
The starting point for a new system, in terms of the design of the law and its implementing
institutions, is perhaps less important than the care with which a jurisdiction takes stock of its
5 On the institutional design choices associated with the creation of a competition policy regime, see David A.
Hyman & William E. Kovacic, Competition Agency Design: What’s on the Menu?, 8 European Competition
Journal 527 (2012).
119
experience and makes improvements over time. Good practice consists of a commitment to
assess the existing framework on a regular basis and to make refinements. Experience in
other jurisdictions suggests that an ideal time for a new regime to assess its progress and
consider refinements is between five and ten years out from the creation of the system. Thus,
a reexamination of China’s antimonopoly system, six years since its establishment, is timely
and desirable.
Compared to other relatively new competition systems, China has accumulated substantial
experience in the implementation of the AML in a very short period of time. Given the
difficulty of creating a new legal regime in any country and the specific difficulties of
establishing a competition regime as part of a fundamental economic transition, this record is
a major accomplishment. Thus, from a comparative perspective, China has progressed
relatively rapidly down the learning curve.
No legal reform of this magnitude is frictionless. All nations that have adopted competition
laws have learned that the emergence of an effective new regime is a slow growth. From
careful reflection upon international experience, it is possible for a newer system to mitigate
implementation difficulties, if only by anticipating problems that appear universally,
regardless of the distinctive circumstances of each jurisdiction. Even with astute examination
of foreign experience, some difficulties in the reform process are unavoidable. Even when a
driver is equipped with excellent maps and guidebooks, the experience of driving an
automobile for the first time in a large, unfamiliar city is a voyage of discovery. The only way
to discovery the best way around town is to drive the car through it.
Experience with the implementation of competition laws in over 125 jurisdictions with
competition law systems indicates the benefits to any nation (including China) of periodic
upgrades. That is why there is special value to a new system from undertaking a basic
assessment of possible reforms from five to ten years after the enactment of the competition
law. This provides sufficient experience to understand the strengths and weaknesses of the
initial design.
China’s Antimonopoly System: Possible Focal Points for Refinement
As established in 2008, China’s antimonopoly law contains the basic portfolio of commands
that one would observe in many of the world’s competition systems. After carefully
examining experience in other jurisdictions, China devised what in many respects is a state of
the art law that addressed the core areas of competition law: horizontal restraints, vertical
constraints, mergers, and abuse of dominance. Presented below are some possible focal points
for examination as China considers the path ahead.
Competition Law in Multi-function Agencies
China assigned enforcement responsibility to three agencies: the Ministry of Commerce
(MOFCOM, which performs merger control; the National Development and Reform
Commission (NDRC), which has jurisdiction over price-related offenses; and the State
Administration for Industry and Commerce (SAIC), which has jurisdiction over non-price
120
related offenses. NDRC and SAIC, have preexisting mandates that are related to the AML
and continue to bear upon the implementation of the AML. NDRC has competence to enforce
China’s pricing law, which supplies a separate mandate to set limits on some pricing decisions.
The NDRC unit that enforces the AML also is responsible for enforcing the pricing law, and
there have been NDRC investigations whose foundations – pricing law or AML – have not
been clearly specified. In addition to its AML duties, SAIC has competence to enforce
China’s law prohibiting unfair competition, a command that applies, among other matters, to
misleading advertising and marketing practices. The SAIC unit responsible for AML
enforcement also is entrusted the implementation of the unfair competition law.
China is not alone in giving the competition authority other law enforcement duties.6 A
number of other jurisdictions have given the competition agency a mandate to enforce
prohibitions on unfair competition. The question of which agency should do what depends
heavily on the analytical connection across the different functions. Where there are strong
conceptual complementarities across the functions, it can make sense to combine them in a
single agency. Where the functions are intellectual substitutes, it is ordinarily best to locate
the functions in separate bodies. The possibility for conflict between functions would be
greater between NDRC’s residual price control authority and its duties under the AML.
Even when the functions are complementary, the unification of discrete tasks in one body can
blur the “brand” of the institution and reduce the clarity of its mission. A single-function
agency has the advantage of being able to define its aims clearly and to resist confusion about
its aims and priorities.
The Structure of Public Enforcement Institutions
For a variety of understandable reasons, China distributed public enforcement authority across
three agencies. For the future, China might revisit this decision and consider a rationalization
that would unify the AML functions of the three existing antimonopoly bureaus in a single
institution. The historical trend in many other jurisdictions (though not all nations) has been
to move antitrust-related functions to a stand-alone entity. Were China to take this path, non-
AML functions would remain with their existing host institutions. Thus, NDRC would
continue to enforce the price law, and SAIC would continue to enforce the law on unfair
competition – perhaps as part of a larger mandate that would make SAIC China’s principal
consumer protection agency.
In all three of these agencies, the antimonopoly bureau is a small unit within a large, diverse
bureaucracy. In each case, the new antimonopoly bureau has confronted the task of
establishing a presence within an institution with well- ingrained customs and power centers.
To a considerable extent, the competition policy mandate of the antimonopoly bureau coexists
with other duties that are in tension with or inconsistent with pro-competition economic
policy.
6 See David A. Hyman & William E. Kovacic, Why Who Does What Matters: Governmental Design and Agency
Performance, 82 George Washington University Law Review 1446 (2014).
121
The subdivision of policymaking authority across various government bodies also can
undermine the coherence of the competition policy regime. The foremost concerns in this
respect arise in the relationship between NDRC and SAIC. As noted above, NDRC is
responsible for price-related non-merger matters, and SAIC oversees price-related conduct.
This is an inherently murky delineation of policy tasks. One could argue that many (if not
most) business practices ultimately affect the prices a firm charges. By this reckoning, NDRC
could assert that its mandate covers non-price arrangements (e.g., a tying agreement or an
exclusive dealing contract) nominally assigned to SAIC. In addition, there are a number of
instances in which a firm adopts a strategy that employs a combination of practices – some
price-related, some “non-price.” A consumer goods producer, for example, might use a
resale price maintenance and exclusive territories to distribute its goods. Is such a case
properly assigned to NDRC, SAIC, or to both?
Such questions of allocating enforcement tasks inevitably will arise between NDRC and SAIC
in the implementation of the AML. Not only is this a source of possible tension and a
coordination burden between NDRC and SAIC, but it also is a source of uncertainty for firms
which are attempting to discern which Chinese agency has authority to review specific
episodes of business conduct.
Nor is it safe to assume that merger control has no connection to non-merger areas of
competition law. The scrutiny of cartels and the evaluation of coordinated effects theories of
merger control share a common analytical core.7 In the course of enforcing prohibitions
against cartels, an agency can learn a great deal that is useful in predicting when firms might
succeed in engaging in tacit coordination following a merger. It is possible for separate cartel
(NDRC) and merger (MOFCOM) agencies to share relevant information and analytical
perspectives through interagency cooperation, but the joining up of relevant information might
take place more readily and completely if carried out within the same institution.
For any jurisdiction, multi-agency configurations raise the costs of coordination not only at
home but in foreign relations. Such complications arise when China’s antimonopoly system
interacts with other competition systems internationally. Having three institutions increases
the effort that must be taken to define and articulate the Chinese view about antimonopoly
issues to individual foreign agencies or before larger international organizations.
Experience in other jurisdictions would suggest that at some point China will revisit the
design of its public enforcement mechanism. A reassessment of the existing framework
might consider whether to undertake a restructuring that would combine the functions of all
three existing antimonopoly units into a single body, and whether to establish the unified
institution as a stand-alone body. In other jurisdictions, these types of adjustment have
sought to accomplish two ends. The first is to give the antimonopoly function greater
coherence and visibility by removing the enforcement function from diversified policy
conglomerates (in China’s case, MOFCOM, NDRC, and SAIC) in which the competition
mandates run a risk of being submerged or subordinated to other policy interests. The second
is to unify policy responsibility to overcome the uncertainties associated with determining
7 These connections are explored in William E. Kovacic, Robert C. Marshall, Leslie M. Marx & Steven P.
Schulenberg, Quantitative Analysis of Coordinated Effects, 76 Antitrust Law Journal 397 (2009).
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jurisdictional boundaries across agencies (e.g., the price/nonprice delineation of power
between NDRC and SAIC) and to avoid the costs associated with coordinating activity
among different institutions.
Restructuring measures along the lines sketched above would align China’s system with
trends globally in competition law. Within the past ten years, several jurisdictions (including
Brazil, France, Portugal, Spain, and the United Kingdom) have combined two or more
competition policy entities into a single public body. A number of relatively new systems
(including Mexico and Morocco) have moved the competition enforcement function from a
bureau within a larger ministry to give the antimonopoly function to a separate, stand-alone
institution.
Not all jurisdictions have undertaken the simplification and integration measures outline
above. Perhaps most notably, the United States continues to allocate enforcement
responsibility between two public agencies (the Antitrust Division of the Department of
Justice and the Federal Trade Commission). I have worked within the U.S. system for the past
35 years and has studied its operation carefully. I raise the possibility of simplification with
an awareness of the costs that the United States regime incurs by sustaining its dual-agency
enforcement mechanism.8 I also acknowledge the tremendous forces of inertia that can
impede, as they have in the United States, structural reforms.
It is important to note that public enforcement is not the only means for the implementation
of competition law in China. An important design feature of the AML is the creation of
private rights of action. As observed in experience with other competition law systems, the
establishment of a private enforcement mechanism has two important implications. The first
is that it divests the public institutions of their capacity to be the sole gatekeeper to determine
the content and sequencing of enforcement matters. Private rights enable private parties –
individual firms or consumers – to bring cases that the public authorities, for various reasons,
have chosen not to prosecute and to accelerate the prosecution of matters that the public
agency might have preferred to bring at another time.
Private rights provide a potentially powerful engine for doctrinal development and policy
implementation beyond the control of government enforcement agencies. In only a few years,
private rights of action have played an important part in the enforcement of the AML. Private
cases have yielded important judicial decisions concerning abuse of dominance and resale
price maintenance. The People’s Supreme Court has issued guidelines to facilitate discovery
and the presentation of evidence in private cases.
Agency Autonomy
It is a common precept of international experience with competition law that competition
agencies should be “independent.” Definitions of this concept vary, but the core idea is that
8 The costs of the federal dual enforcement mechanism in the United States are reviewed in William E. Kovacic,
Antitrust in High-Tech Industries: Improving the Federal Antitrust Joint Venture, 19 George Mason Law Review
1097 (2012).
123
the competition agency should have autonomy from political branches of government in
exercising its authority to initiate or resolve cases. At the same time, there is general
agreement that a competition agency should be accountable to the political process for its
policy choices – for example, by being required to disclose the basis for its decisions, by
issuing statements of its priorities and enforcement guidelines, and appearing before political
officials from time to time to discuss their enforcement programs. There also is a general
awareness that a competition agency must have some connection with the political process if
it is to function effectively as an advocate for competition before other government bodies.
China has no experience with “independent” regulatory bodies as the concept is defined
immediately above. China’s antimonopoly agencies confront at least two conditions related
to their capacity to apply their enforcement powers with a necessary level of autonomy. As
noted above, the antimonopoly bureaus of MOFCOM, NDRC, and SAIC are small subunits of
large, diversified policy conglomerates. Within its host institution, each unit coexists with
well- established bureaus with economic interests and policy views in tension with the
competition law.
China’s antimonopoly bureaus also face countervailing policy views and economic interests
from government bodies located outside their own institutions.
Examples include other ministries that oversee specific sectors or individual state- owned
enterprises or government administrations at the provincial or municipal level. As in many
other countries, these external bodies sometimes press the antimonopoly units to resolve
individual matters in ways that favor the interests represented by the external bodies.
Procedure
To speak of good procedure for a competition system, I have three things in mind: quality
control in the sense of a rigorous testing of evidence that leads to an accurate diagnosis of
observed behavior, legitimacy that comes from the use of processes that give affected parties
and the general public confidence in the soundness of the agency’s methods and substantive
conclusions, and the minimization of delay.
From international experience, it is evident that several characteristics of competition agency
practice tend to promote the attainment of these ends. One essential foundation, is meaningful
disclosure, or transparency. Competition agencies (or all government agencies, for that
matter) do not always willingly embrace norms that promote fuller, meaningful revelation of
information about their operations and decisions. I have noticed that this tendency is more
pronounced in newer systems. The reluctance of newer competition agencies to disclose more
information has many sources, including the fear of being bound in a rigid manner by past
decisions, or the uncertainty that comes from limited experience with a field of law.
These misgivings are understandable, yet fuller disclosure serves to accelerate an agency’s
progress by strengthening internal decision processes and educating external audiences more
effectively. For example, a leniency program is unlikely to succeed unless the competition
agency is clear about the terms on which leniency will be available and about the conditions
that firms must satisfy to quality. Meaningful disclosure also can stimulate a healthy debate
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about what the agency has done and assist the agency to identify possible improvements in its
analysis and procedures. Thus, as a source of better guidance to affected parties and as a
symbol of good governance, broader disclosure serves the interests of a new competition
agency.
Over time, China’s antimonopoly agencies have taken progressively greater steps to explain
how they intend to apply the AML. In developing enforcement guidelines, China has
followed the internationally accepted practice of issuing draft documents and soliciting
comments from external groups. This is a valuable means for achieving a necessary degree of
transparency – the meaningful disclosure of information about substantive decisions taken, the
agency’s priorities, and the analytical approach it uses to do its work.
As suggested above, agencies in the first phase of their institutional life tend to function more
effectively as they disclose more about how they do business. This consideration presses in
the direction of expanding existing initiatives to provide further guidance about enforcement
intentions and analytical methodologies.
Expansion of existing MOFCOM, NDRC, and SAIC efforts to provide guidance about agency
enforcement intentions and analytical methods likely would serve to improve the
implementation of China’s AML. Means to this end include the issuance of additional formal
guidelines (e.g., the pending SAIC guidelines on competition law and intellectual property
rights), public speeches and appearances at conferences, and the publication of answers to
“frequently asked questions” about the content and application of the AML. These and elated
measures can increase the effectiveness of China’s enforcement regime by improving the
transparency of its operations.
A second necessary element of good process is to provide the subjects of agency inquiries a
meaningful opportunity to discuss the agency’s theory of harm and to provide its own view of
the theories and evidence the agency intends to apply. In widely accepted international
practice, this approach involves allowing representatives of the company and its external
advisors (e.g., its law firms and economic consultancies) to meet with the agency to discuss
pending inquiries and proposed enforcement measures. The agency also should be responsive
to the requests of affected parties about the status of existing agency inquiries and about the
expected path of deliberations going ahead.
A third foundation for good process is judicial review of agency action. Recourse to
effective judicial review provides an important safeguard against serious agency error and
impels the agency to maintain high levels of internal quality control.
Perhaps the single area in which the urgency to increase the speed of agency decision making
is merger review. Inordinate delays raise the uncertainty associated with carrying out routine
transactions and complicate the completion of mergers involving firms active in dozens of
jurisdictions. MOFCOM has taken major steps to introduce a simplified merger review
procedure for matters that appear to pose no competitive hazards.
A further element of good process is a commitment to examine past experience as a way to
improve future performance. A fundamental question concerning the enforcement of a
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competition law in any jurisdiction is effectiveness: How do we know that an enforcement
program is accomplishing its intended aims – to cure existing competitive harms, to
compensate victims, to deter future offenses? In many areas of competition law, enforcement
has an inherent element of experimentation. Over time, a competition agency tests a number
of approaches to solve specific competition problems, curing the effects of past
anticompetitive behavior, and obtaining deterrence. An important component of the selection
of remedies is the development of even rudimentary means to assess whether they are
working as intended.9 Among other means, this can be achieved by performing even a rough
comparison between the agency’s expectations about future commercial developments and
what actually transpired.
Human Resources
No single factor is more vital the success of a competition agency than the quality of its human
capital. Through adequate resourcing and by building a high quality professional and
administrative staff, an agency improves its ability to analyze accurately the competitive
significance of business conduct and increases the speed with which it performs its work.
Competition law systems with serious deficiencies in human capital often encounter a
crippling mismatch between the commitments embodied in the competition law and the
capacity of public institutions to fulfill their duties properly.
From the first days of the AML’s implementation, China has given the three antimonopoly
agencies too few resources to carry out their responsibilities. All three agencies have recruited
some highly capable professionals and administrators, but the level of staffing falls well below
the numbers that competition agencies in other jurisdictions have found necessary to operate
effectively.
Understaffing can create at least five distortions in a competition law system. First, the
agencies have too few resources to conduct in-depth inquiries in matters that warrant careful
fact-gathering and analysis. Pursuant to the commands of the AML, the three antimonopoly
agencies have undertaken ambitious agendas, including the examination of behavior involving
considerable analytical and factual complexity.
Second, the lack of resources creates tremendous pressure upon the competition agency to
obtain settlements to resolve apparent violations of the law. In some cases, agencies may
press parties to make concessions early in the life cycle of a matter, in lieu of a more
deliberate process of evidence-gathering and analysis. Proper resourcing relaxes the pressure to
use settlement short-cuts to address complex commercial phenomena that deserve closer study
and fuller deliberation.
Third, inadequate resourcing tends to extend the duration of matters for which the agencies
have chosen to undertake a more elaborate investigation. This is particularly true where an
agency is running two or more complex inquiries at one time.
9 On the importance of this type of assessment, see William E. Kovacic, Using Ex Post Evaluation to Improve the
Performance of Competition Policy Authorities, 31 Journal of Corporate Law 503 (2006).
126
Fourth, weak resourcing can deny an agency the means it requires to monitor fulfillment of
obligations imposed on firms through decisions taken by the antimonopoly agencies (by
settlement or otherwise). The credibility of undertakings provided by companies depends
heavily upon the expectation of business operators that the competition authority will
oversee compliance with their terms. As a related point, an agency with too few resources
is likely to invest too little effort to determine whether specific remedies achieved their
intended effects. This form of evaluation provides valuable insights to the competition
about how to design resources in future cases.
Fifth, under-resourcing impedes an agency’s engagement in valuable work beyond the
investigation and prosecution of cases. Relevant tasks beyond investigation and prosecution
include the preparation of guidelines or other policy instruments that inform businesses about
the agency’s priorities and its intentions about the application of the law. These non-
litigation activities can play a useful role in gaining compliance with the law, but the
demands of law enforcement matters can tend to divert resources away from these initiatives
A weakly resourced competition agency will be especially prone to invest too little effort to
use non-enforcement instruments to improve the performance of the competition system.
The Role of the Courts
The development of China’s antimonopoly system has been accompanied by major
enhancements in the country’s judiciary, especially within the chamber of the Supreme
People’s Court responsible for intellectual property issues. This chamber has played a
crucial role in the evolution of private rights of action and in providing a forum for the
resolution of cases brought by the government agencies. In many countries, judicial
decisions have provided valuable interpretations of competition laws and have raised the
quality of competition policy analysis within the jurisdiction. In effect, the courts engage in
a long- running conversation with the enforcement agencies, academics, and the business
community.
The reported decisions in the Qihoo/Tencent and Johnson & Johnson cases are examples of
instances in which China’s courts can raise the quality of discourse about competition law.
The judges of the intellectual property chamber have participated in a wide array of judicial
education programs related to competition law, and their work in dealing with competition
law disputes reveals an impressive sophistication in this field.
International experience suggests that effective judicial review is a valuable means to improve
the quality of decisions by administrative agencies and to increase the perceived legitimacy of
a competition system. A major question for the future development of China’s competition
law system is the availability of judicial review to oversee decisions taken by the three public
antimonopoly bureaus. In theory, recourse to judicial review is available to challenge agency
action. In practice, I am aware of no instance in which a party has used the existing
machinery of judicial oversight to challenge agency action.
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PANEL II QUESTION AND ANSWER
COMMISSIONER WESSEL: Thank you, a l l , for being here on what is a
cr i t i cal issue , a very complex one.
I want to t ry and understand how the relat ionship between the
inst i tut ions, the procedural and the other i ssues , and the s tandards , and, Ms.
Wang, you said that China is on this march, is on this path to being a
market economy. I want to quest ion that because the s tandards that one
appl ies depends on how one v iews the role of your compet i t ion laws . We
have a market economy s ta tusmind -se t . Does China r ea l ly have that mind-
set? Is that real ly what the purpose of thei r compet i t ion laws are when one
looks at the upcoming 13th Five -Year P lan?
I agree with al l the t ransparency and al l the other i ssues , and they' re
s t i l l in the i r in fancy, but can one real ly disengage or detangle the s tandards
from the procedural issues you 're talking about? Each of the witnesses ,
please .
DR. WANG: Thank you for the quest ion, Commissioner.
I am an economist so I wi l l just t ry to answer your quest ion f rom an
economic point of v iew. What I see when I say lack of ful l economic
market mind-set , I 'm thinking and talk ing about the business and
government body, whether they a l low or have the envi ronment for the
business operator to have fu l l au tonomy to make bus iness decis ions .
What I see r ight now i s tha t they have varying degrees of that . Some
companies , even though they' re private , they s t i l l do not have the ful l
autonomy of making some very impor tan t business decis ions such as naming
new management or set t ing price somet i mes . So I think th is is one area that
is not there yet .
MR. LIPSKY: I agree with Dr . Wang. Every jurisdict ion, even ones
that have a fai r l y heavy commitment to a market economy, as the United
States does, as the UK and other European nat ions do, wi l l i mpinge, wi l l
have government ac t ion that impinges upon that economic act ivi ty to some
s ignif icant ex tent . I think i t 's p robably to a greater ex tent in China than i t
i s in a lot of o ther juri sdict ions, bu t in the United States , for example , in
the 1970s, we had very heavy intervent ion and regulat ion of some
fundamental indust r ies - -elec tr ic i t y generat ion and dis t r ibut ion, domest ic
ai r l ines , domest ic f reight t ransportat ion .
And very much to the good, I think, al l o f those forms of regulat ion
were very s igni f icant ly cut back, and some of them ent i rely overthrown.
The Civi l Aeronaut ics Board and the In ters tate Commerce Commission no
longer ex is t . The energy indust ry re l ies much more heavi ly on compet i t ion
now than i t d id 30 years ago.
This evolut ion , i t seems to me, has progressed to a much more l imited
degree in China , and anything we can do to accelerate i t I think wil l be to
the good.
MR. KOVACIC: I would add that one of the interest ing features in the
AML is that there i s a speci f ic mandate for the ag encies to be engaged in
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deal ing with overreaching by s tate -owned enterprises and by municipal or
other government authori t i es that seek to put a thumb on the scale wi th
respect to who enters the market and who part icipates .
That is in a sense an underdeve loped element of the Chinese scheme. I
think we 've observed s lowly over t ime more a t tent ion to that . I think a
promis ing aspect of the AML is that the ant i -monopoly authori t i es are some
of the only inst i tut ions in China which have a mandate to speci f ical ly
address those imbalances , and, in the br ief his tory that Tad described, i t
was the Depar tment of Just ice principal ly that p layed a major role as an
advocate, sometimes as a l i t igant , in changing percept ions about the
appropriate scope of s ta te ownership and regulatory cont ro l in the United
States . Something that could happen in China is we 'l l see a s imilar
progression there, too.
COMMISSIONER WESSEL: Thank you.
CHAIRMAN REINSCH: Okay. Commissioner Shea.
VICE CHAIRMAN SHEA: Thank you al l for being here . I apprecia te
your tes t imony.
Now, Mr. Lipsky, you were a t Coca -Cola? You were the an t i t rust
counsel?
MR. LIPSKY: Yes, correct .
VICE CHAIRMAN SHEA: You lef t though in 2002; i s tha t correct?
MR. LIPSKY: Yes, before the fun s tar ted in China.
VICE CHAIRMAN SHEA: Right . Now, I 'm sure i f you were s i t t ing in
that chai r , what happened in 2009 would not have happened; r ight? And I 'm
referr ing to Coke 's acquis i t ion of Huiyuan --how do you pronounce-- juice
company.
MR. LIPSKY: Huawei , I think --not Huawei . It ' s Huiyuan, Huiyuan.
VICE CHAIRMAN SHEA: Right . And are you famil iar wi th that?
That seemed, to my understanding, that was sort of the f i rs t big Western
acquis i t ion at tempt under this new law, new regime, and people were sort of
shaking thei r heads, how could -- i t ' s a ju ice maker . It ' s no t some sort of
nat ional securi ty asset that ' s being purchased, and i t was re jected .
Do you know what - -could you enl ighten us about what the
ci rcumstances were , and i f there are lessons learned s ix years la ter here in
2015, have things changed?
MR. LIPSKY: Well , l et me has ten to point out I was not involved in
any way in the handl ing of that mat ter , and so --
VICE CHAIRMAN SHEA: But i f you were, i t would have come out in
a bet ter way?
MR. LIPSKY: Well , undoubtedly.
VICE CHAIRMAN SHEA: Right .
[Laughter . ]
MR. LIPSKY: So what I 'm going to say is jus t based on --
VICE CHAIRMAN SHEA: Sure.
MR. LIPSKY: --careful newspaper reading. Fi rs t o f al l , based on
experience wi th very many new and old ant i t rust regimes around the world
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on behal f of Coca-Cola , you 'd be surpri sed how touchy some count r ies are
about thei r beverage bus inesses .
You may recal l that the French re jected an effor t by the Coca -Cola
Company to acqui re the Orangina brand back in the 1990s . So i t ' s no t a - -
VICE CHAIRMAN SHEA: I missed that one .
MR. LIPSKY: It ' s not an en t i rely unknown phenomenon in var ious
jur isd ic t ions, but what s t ruck me about the decis ion there i s that
immediately af ter that decis ion was made, the comment , usual ly I suppose
intended as a cr i t i ci sm, was that the Chinese , what the Chinese had actual ly
done in that decis ion was to protect an importan t indigenous local ly -owned
brand. It was a ju ice brand, but i t was an important brand nevertheless .
And one could have debated based on the fai r l y ex tensive defense of
i ts decis ion that MOFCOM publ i shed , one could have debated to what
ex tent that played a role. MOFCOM, of course, t r i ed to put i t en t i re ly on
compet i t ion law grounds.
But in my personal view, I think they ma de a Freudian s l ip a few
months la ter that revealed their t rue s t r ipes . As you may be aware, one of
China’s most serious adminis t rat ive problems in thei r merger review was
tha t they' re ex tremely s low relat ive to o ther jurisdict ions . For complica ted
mergers that pose s igni f icant is sues , i t ' s not so apparent . But the Chinese
have had part icular t rouble promptly reviewing and c learing t ransact ions
that sel f -evident ly have no compet i t ive implicat ion and therefore there has
been a lot of focus on that .
The Chinese have acknowledged that problem, and they i ssued a
proposed regulat ion announcing that they would t ry to adopt cr i ter ia for the
ident i f icat ion of t ransact ions that would requi re a more lengthy review,
which suggested that t ransact ions that d id not me et those cr i ter ia would be
prompt ly rev iewed.
Well , I think there were s ix cr i ter ia , and one of the cr i ter ia was that
the target company owns a famous Chinese brand. So somehow this made i t
through the dip lomatic screens at MOFCOM, and so I took that as a s ignal
tha t , in fact , the involvement of an important indigenous brand i s an
importan t considera t ion in thei r merger analys i s , perhaps independent ly of
the compet i t ive imp
l icat ion , and of course that ' s an issue when you 're talk ing about deviat ion
from s t r ict l y compet i t ion -based cri ter ia in your merger analys is .
VICE CHAIRMAN SHEA: And that ' s s t i l l in place today?
MR. LIPSKY: Well , that part icu lar feature was not present in the f inal
regula t ions. The s impli f ied procedure was adopted, and i ts early
implementat ion seems to be , seems to contain a lot of promise al though
there are s t i l l a lot of so -cal led "no-bra iner" t ransact ions that requi re
several months to clear .
VICE CHAIRMAN SHEA: Okay. Thank you.
CHAIRMAN REINSCH: Okay. Commissioner Fiedler .
COMMISSIONER FIEDLER: Just a quick quest ion. Clearly American
business feel s tha t i t 's being targeted for undue at ten t ion, l e t 's jus t
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characterize i t . Are they?
MR. KOVACIC: I f ind i t ex tremely d i ff icu l t , Commissioner , to come
up with a basel ine for deciding how much compared to where else . Like
you, I see the concerns , and I read about them a great deal , but I f ind i t
di f f icu l t to develop a sense of how to measure the amount .
COMMISSIONER FIEDLER: So you don 't know?
MR. KOVACIC: I don ' t know.
COMMISSIONER FIEDLER: El izabeth?
DR. WANG: I think the data out there is not enough to say r ight now.
We see, we see a few cases . For mergers , l et ' s remind ourselves 97.4
percent are cleared without problem. A lot of them are fore ign companies .
And for adminis t rat ive invest igat ions , again, the number shows the large
major i t y are domest ic companies so I th ink in order to ful ly understand the
issue , we need a lot more and more datapoin ts .
COMMISSIONER FIEDLER: Okay. So you don ' t know ei ther?
DR. WANG: No.
COMMISSIONER FIEDLER: Okay. You don 't have a comment on i t?
MR. LIPSKY: I guess my comment would be that in any sys tem where
your ant i t rust enforcement is not avowedly devoted to sound compet i t ive
and economic analysis , your cr i ter ia are going to come into quest ion , and
because of al l the other issues in the U.S. -China economic relat ionship , I
think the Chinese ant i t rust review i s uniquely suscept ible to th is cr i t ic ism
because they incorporate in thei r l aw th is idea of protect ing of - - I forget the
precise phrase -- the nat ional - - i t ' s the nat ional social is t economy or
something.
And so they almost invi te th is t ype of specula t ion, and because they
are l imited in thei r t ransparency, there real ly is no effect ive way to rebut i t .
COMMISSIONER FIE DLER: Well , there 's l imited t ransparency on
every level . Let me have a fol low -up quest ion that I perceive to be s imple.
I thought the las t one was s imple, yes or no , but is the enforcement of the
ant i -monopoly sys tem more pol i t i ca l or more legal? In th e major i t y? I
mean, okay, I mean, look, ant i t rust in the Uni ted S ta tes i s part ial l y
pol i t ical , I would argue. People make decis ions in the Just ice Depar tment
to go after companies and not others . So there 's a pol i t i ca l e lement in i t .
I 'd say maybe 20 p ercent . I mean this off the top of my head, and 80
percent s t raight forward legal , o r i f I can make the case I 'm going to win .
What about China? Is i t 80 percent pol i t ical? Or is i t 20 percent? Or
is i t - -what 's the - -now, in order to ease your calcu la t ion, just give me a
major i t y. Is i t more pol i t i cal or more legal r ight now?
MR. KOVACIC: Who knows?
DR. WANG: I have no --
COMMISSIONER FIEDLER: Well , by the way, the answer is i f i t ' s
not -- I mean your answer of "who knows" is that i t ' s more pol i t i ca l because
legal answer would be c lear .
MR. KOVACIC: Commissioner, I don ' t know how I would measure
that for the Uni ted States . 20 percent , 80 percent - -
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COMMISSIONER FIEDLER: No, I was --
MR. KOVACIC: I can ' t t el l the - -
COMMISSIONER FIEDLER: It ' s l ess pol i t i cal than i t i s l egal ; i s tha t
correct? In the Uni ted States?
MR. KOVACIC: I would say so , but a l l o f the legal decis ions are
taken in a context of intense pol i t i cal interest s , especial ly for mergers .
COMMISSIONER FIEDLER: What do we read th is morning? That
Qualcomm is being threatened with a bi l l ion dol lar f ine . Does anybody in
this room bel ieve that some, one of the two or I mean one of the three
newly estab l ished embryonic not - ful ly-aware agencies handl ing AML could
get away with that wi thout the Pol i tburo knowing that this bi l l ion dol lar
f ine was on the tab le? Is tha t the way the Chinese decis ion -making sys tem
works?
People at the bot tom of the cent ral government or somewhere near the
middle make decis ions that the top i s unaware of on that kind--on that l evel
of consequence?
MR. KOVACIC: I would jus t ask i s there a compet i t ion agency in the
world that would take a decis ion l ike that wi thout being aware of the
preferences of elected off icials?
COMMISSIONER FIEDLER: Hey, look , I 'm no t rea l ly going af ter the
Chinese . I 'm just making an observat ion of whether - - I think the evidence
that we 're p icking up anecdotal ly is i t ' s a pol i t i ca l process a t thi s point in
his tory. Dangerous for American companies . They feel aggrieved . They
fee l they' re being targeted . You know, while I 'm not part icularly
sympathet ic to them, I do unders tand that they probably have a pret ty good
read on that they' re being targeted. That 's why I 'm a l i t t l e hesi tant to say
why you guys are res is t ing thi s not ion tha t they' re being targeted.
MR. KOVACIC: I 'm res is t ing because I f ind in many ways the concept
is so amorphous and the request for a yes or no answer for where i t depends
so much is hard to say. I would say that in the scheme of agencies early on ,
and I 'd say China is cons is ten t with many other agencies , i s the agency in
i ts ear ly s tage more responsive to the demands of a pol i t i ca l sys tem than i t
i s l ater in i ts exper ience, I 'd say yes , unmistakably.
And in that sense, China 's agency in the spect rum of al l agencies
because younger , because t i ed to the speci f ic sys tem of pol i t ical control ,
more a t tent ive to and in teres ted in what pol i t i cal leadership has to say.
COMMISSIONER FIEDLER: Thank you.
MR. KOVACIC: So genera l ly speaking, yes .
COMMISSIONER FIED LER: Thank you.
CHAIRMAN REINSCH: Okay. Commissioner Slane.
HEARING CO-CHAIR SLANE: I hate to kick a dead horse here, guys ,
but when I read the comments of the Nat ional People 's Congress members
debat ing the MLA, the lack of t ransparency, the lack of due process ,
select ive enforcement , i t seems to me the law was enacted in large par t to
curb the influence of foreign companies to protect thei r domest ic indust r ies ,
a perverted use of the law driven by pol i t i ca l pol icy and not for compet i t ive
132
reasons.
Am I miss ing something or do you guys agree or d isagree?
MR. LIPSKY: I 'm not an expert on the legis la t ive his tory. I suppose
i t 's ent i rely plausible that the meri t s of having a compet i t ion law would be
sold in part on the rat ionale that these laws could be made avai lable for
such a purpose .
There is precedent in other juri sdict ions . You know, Japan received the
blessing of an ant i t rust law through General MacArthur and the All ied
powers , and ini t i al ly had a very aggressive law designed by an American -
educated Marxis t economist , which underwent very radical revis ion as soon
as the Japanese got the degree of l egis lat ive independence necessary to
change that l aw.
And one can observe in the course of Japanese ant i -monopoly
enforcement over the period f rom po s t-war to say roughly the Washington
Consensus era of the early 1990s that they were engaging in uses of the law
that were cr i t ic ized on bases that echo this cr i t ic ism of the Chinese Anti -
Monopoly Law. So there could wel l be an e lement of that .
MR. KOVAC IC: I 'd say there were many purposes . That was one of
them. It coexis ted with o thers . There were those who saw the mechanism
as a way to push back against the s ta te in some instances. There were those
who saw i t as a necessary mainst ream element of go od economic
pol icymaking, but in China and el sewhere , as Tad said, I think you do see
an impulse to use the law reflec ted in the s tatute to deal with these larger
indust r ial pol icy concerns.
It ' s unmistakably there . Is i t the dominant impulse? I 'm not sure I can
measure . I would say that many jur isdict ions begin thei r l aw with such a
fea ture in i t . There is a t endency over t ime to back away f rom i t , but of the
125 today, I 'd say roughly hal f would have a provis ion that is s imi lar to
that , and , in the early s tages , i t tends to receive more a t tent ion, have more
effect .
The tendency over t ime is i t becomes less s ignif icant . I 'd say i t ' s
unmistakably there . Whether I 'd cal l i t the dominant impulse I 'm more
uncertain about tha t . It coexis ted with other purposes , but i t i s there, as
Tad said. It shows up in many laws. My experience is i t becomes
somewhat more at tenuated over t ime as a cont rol l ing inf luence in what the
agencies do.
HEARING CO-CHAIR SLANE: I guess that ' s where, you know, where
I t ake is sue with you. You know, they' re using i t for pr ice cont rol . They're
using i t to prevent mergers . They're us ing i t to ex tract IP and other
concessions when they do approve the mergers , and I th ink that for us to
hope that thi s i s going to evolve in a com pet i t ive or economic -based law
over t ime is , i s not the way things are done in China .
And, you know, they' re not interested in playing with the global rules .
They have thei r own set of rules . I mean that ' s how I - - I don 't see i t ever - - I
think i f I 'm hear ing you r ight , I think what you 're saying is tha t o ther
jur isd ic t ions have s tar ted out th is way and then evolved into a compet i t ive
133
basis on thei r l aw. I just don ' t bel ieve China wil l ever get there.
MR. KOVACIC: What predict ion would you have made abou t the
direct ion of Chinese economic pol icy 30 years ago?
HEARING CO-CHAIR SLANE: I th ink that we gave the s tore away on
the bas is that China was going to become a democracy because we were
going to al low them to be prosperous on the backs of our economy, and that
didn ' t work out , and I think that had we rea l ized that going in , we might
have taken a di fferent course of act ion .
MR. KOVACIC: I 'm just suggest ing that i f the mechanisms you
describe were immutable , so res is tant to change, I 'd sugges t that the past 30
years couldn ' t have happened, that the Chinese economy could not have
taken the path that i t did, and I would have a bi t more confidence that th is
t ype of evolut ion can take place, though I acknowledge that when you have
suggested changes that so unset t le ent renched interests , those kinds of
changes are very d if f icul t .
But , again , those of us a t my age would not have predicted the Chinese
system would have emerged as i t d id 30 years ago i f there was an
immutabi l i t y about the sys tem and an impervio usness to change.
CHAIRMAN REINSCH: Okay. Okay. Commissioner Goodwin .
COMMISSIONER GOODWIN: Thank you.
Let me ask a quest ion befi t t ing a panel of l egal experts . Is the AML
law legal under internat ional l aw and is i t be ing appl ied in a manner
consis tent wi th China 's t reaty obl igat ions? We have in our brief ing
materials a paper wr i t ten I bel ieve la te las t fal l by the U.S . Chamber which
suggests that i t could be in violat ion of those s tandards wi th the expected
lawyer ly caveats , but i f the AML is indee d discriminatory, and i f i t ' s being
appl ied in a d iscr iminatory manner, th is paper makes the case that that , in
turn, could arguably vio la te the WTO obl igat ion.
So my quest ion to the panel is , as draf ted , t ak ing into account the
noncompet i t ive factors tha t the law includes, does i t run afoul of the WTO
obl igat ions of China? And second, is i t being appl ied in a manner , a
discr iminatory manner, that also v iolates those pr incip les?
MR. LIPSKY: I 'm not sure I 've got the r ight expert i se to address that
quest ion , and I 'm not going to offer you a legal opinion, but I cer ta inly
understand how the Chamber ar r ives at this l ine of reasoning. There are
some, you know, basic principles that under l ie WTO obl igat ions.
It tends to be a commonly expressed point of view , or i t did tend to be
15 or 20 years ago , tha t one of the reasons the Chinese adopted an Anti -
Monopoly Law was that i t was in some sense a requi rement of ful l WTO
accession, and I suppose that is based on something.
Now, the United Sta tes has had some ex perience in t rying to approach
this quest ion of government implementa t ion of compet i t ion law in ways that
violate t rade obl igat ions . You may recal l there was a so -cal led "Special
301" of our Trade Act , which gave a t rade remedy i f the Japanese
government , i f a foreign government - - the Japanese turned out to be the only
ones, I think, that were ever subject to this provis ion -- i t provided some
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means of t rade re ta l iat ion i f the government acquiesced in ant icompet i t ive
conduct and fai led to enforce i t s an t i t ru st l aw in a way that discr iminated
against t rade with Japan from the Uni ted States , and i t l ed to th is huge long
complicated dispute between Kodak and Fuj i , but I don ' t think i t ever
actual ly led to any internat ional remedy.
I think whatever problems exis ted were worked out by consent and
agreement to the ex tent they were ever worked out . So I 'm sorry that I can ' t
answer the quest ion legal ly, but I guess what I 'd l ike to suggest i s that the
long way back to the barn i s through t rade remedies .
The Europeans very aggressively pushed a WTO compet i t ion discipl ine as a
part of the Singapore Round. I l ike to th ink that I was inst rumenta l in
persuading the USTR to oppose that approach because the American Bar
Associat ion Ant i t rust Sect ion and other s imi larly minde d groups share the
view that t rade inst i tut ions are pecul iar ly unsui table to address this kind of
problem wi th compet i t ion laws, but I certain ly wish, have a l l good wishes
for the U.S . Chamber and thei r ambit ions in th is area. So we 'l l see where
that debate goes.
MR. KOVACIC: I 'd l ike to add I 'm not a WTO expert and don 't have
the technical foot ing to give a confident answer . My impression on the
draft ing of the s tatu te i tsel f , as Tad suggested, is that i t f i t s wi thin a
mainst ream of acceptable pract ice .
My sense is f rom ta lking to my t rade co l leagues at school is that
there 's qui te a bi t of given the Join t 's about whether the appl icat ion of
individual nat ional laws r i ses to the level of being so id iosyncrat ic that
they can be said to be di scriminatory in thei r appl icat ion . My impression ,
as Tad 's was , i s tha t i t would be fai r l y d if f icul t to es tabl ish given the
indis t inctness of the s tandards that the appl icat ion of the law i t sel f was a
WTO vio la t ion, but tha t doesn ' t deny the importance of discussing t he
appl icat ion on i ts own terms and having a ful l debate about whether those
s tandards are su i tab le.
My sense would be the answer to the quest ions would be no and no , but
in answering that way, I wouldn 't suggest tha t the di scussion and
examinat ion of the poin ts that have caused so much f r ict ion is not worth a
lot of at tent ion .
CHAIRMAN REINSCH: Thank you.
I recal l the Kodak case. I 'm not sure that 's ent i rely relevant to the
quest ion , but i t was l i t igated at the WTO. There was a decis ion. It wasn ' t
worked out . Kodak lost . I 'm not sure what that means for ant i t rust l aws . It
didn ' t mean anyth ing very good for Kodak.
COMMISSIONER WESSEL: That was nul l i f ica t ion and impairment
done on--
CHAIRMAN REINSCH: It wasn ' t on th is - -
MR. KOVACIC: Correct .
CHAIRMAN REINSCH: Yes. Exact ly. Al l r ight . We s t i l l have t ime,
and we s t i l l have some other commissioners to go. Commission Tobin i s
next .
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COMMISSIONER TOBIN: Great . Thank you.
Al l th ree of you have spoken almost harmonious ly about the fact that
a round the world i t takes a whi le for any count ry, including our own, to
es tabl ish an ef fect ive an t i -monopoly sys tem, and you also convey that i t has
to be updated . We don ' t have the data , as you sa id, Ms. Wang, to be able to
see i f we ' re being targeted so we don ' t know, and maybe i t wi l l evolve to
provide bet ter vis ib i l i t y on data .
But I want you to put on another hat , beyond your lawyer and your
economist hats . Many of our companies , many mult inat ional companies do
fee l they are being unfa ir ly focused on and punished. What would you
recommend we as a Commission suggest companies might do or what might
Congress do or what an execut ive might do for those companies to have a
more level playing f ield whi le there 's th is t rans i t ion?
So, i f you would , put on a di f ferent hat for a few minutes here and help
us see what can be done act ion -wise while there is thi s s low process?
MR. LIPSKY: Well , l et me take a s tab at that . I agree with Bi l l tha t
one of the things that we should do i s be pat ient and awai t this na tural
evolut ion that he describes , and I th ink things wil l evolve in a good way in
China and in other juri sdict ions.
But as I t r i ed to suggest in my opening remarks, U.S. ant i t rust ran in to
a di tch al l on i ts own in the '60s and '70s , and i t took a t rem endous amount
of ef fort to put things r ight , to get i t ou t and put i t on the path of rat ional
compet i t ive and economic analys is .
COMMISSIONER TOBIN: I unders tand that , but what can be done for
our companies who are experiencing thi s and have a d if ferent percept ion?
MR. LIPSKY: Well , what I am suggest ing i s that in the U.S . , this
problem was not remedied, quote -unquote , "f rom with in" except to the
ex tent that Jus t ice Powell wrote the Sylvania decis ion and some very
eminent scholars , l ike Robert Bork , wro te these wither ing cri t iques of this
faul ty U.S . an t i t rus t tendency, and then Ronald Reagan was elected, and al l
of that got put more or l ess r ight , and that consensus pers is ted more or l ess
unt i l a few years ago.
If you look at other jur isd ic t ions -- le t 's t ake the European Commission
as an example --compet i t ion decis ions in the European Commission are made
by the Commission. Now, in pract ice , they are delegated to a great ex tent
to the special ized DG Compet i t ion, but over the years , and I 've had very
direct experience wi th this , there have been some very pointed complaints
about procedural fa i rness in the European procedures .
There is no oppor tuni ty to present evidence to a decis ion -maker. The
decis ion-maker is the Commission , but you present evidence to the s taf f .
There are a lot of biases in the sys tem that al low the Commission to do
pret ty much what i t wants . There are long judic ia l delays . There is no
part icular t radi t ion of economic analys i s in the judiciary.
Now, the point I want to make is the E uropean Commission has been
very, you know, has been cri t i cized aggressively on this point , and yet the
progress has been extremely l imited . So I wouldn 't rely on natural
136
evolut ion in the European case. I wouldn 't re ly on i t in the American case .
I wouldn 't rely on i t in the Chinese case .
But you 're ask ing a very profound and meaningful quest ion . Well ,
what do we rely on? Maybe we need something of the nature of a new or
dif ferent ins t i tu t ion . I ment ioned that most of the d iscussion about reforms
along these l ines , they take place in the enforcement community. I don ' t
think we can look to the enforcement community to say let ' s have less
enforcement . Let ' s l imit our powers in the name of due process , in the
name of economic analys i s , o r any o ther wort hy goal . It ' s just not in their
nature .
When you get enforcers together , they talk about how to ge t more
enforcement and how to improve enforcement , and --
COMMISSIONER TOBIN: So just so I make certain I ge t a chance to
hear f rom the others .
MR. LIPSKY: Yes. I 'm sorry to be so long -winded.
COMMISSIONER TOBIN: So basica l ly wai t for this to get bet ter , l et
the enforcers remedy i t themselves? What would you say to the companies ,
Dr . Wang. Or beyond that , what recommendat ions would you make?
DR. WANG: I feel tha t how we communicate and which channel we
use to communicate is very important . The message needs to come across
from as many d i fferent venues as possib le. People in China , business
people, or government people , regula tors , and Western comp anies and
lawyers , they a l l have di f ferent mind -se ts .
I fee l l ike cu l tural business and di fference i s very di f ferent sometimes.
What worked for me in my own experience was that we s tar t f rom detai led
specif ic fact s , and then we bui ld from there. And, of course , mult ip le
prongs of ef fort s , abst ract , pol icy, di rect ional , tha t 's helpful . But what 's
rea l ly, rea l ly ef fec t ive is during these case -speci f ic discuss ions have more
specif ic fact - f inding and analyt ical dia logue. And ask what exact ly do you
mean by you 're f inding thi s specif ic ant icompet i t ive harm? How can we
help you to look at this speci f ic fac t? How about the o thers? And I th ink
that 's probably easier to come across .
COMMISSIONER TOBIN: Thank you.
And Professor .
MR. KOVACIC: I would do many of the things that I think they' re
doing now and sus ta in that effor t . What are they doing now? They're
t rying to engage as much as they can wi th publ ic of f icials in the United
States and in China to make thei r views known.
I think that had some influen ce in the adjus tments tha t were made as a
resul t of the December conversat ions between the United S tates and China.
The formal s tatement tha t cer ta in procedural norms would be fol lowed, I
think that 's a direct resul t of that kind of engagement .
There 's a cont inuing par t icipat ion in the work of legal socie t ies ,
univers i t i es and the way in which they teach compet i t ion law, work through
t rade associat ions, the companies , they' re act ive in those areas , sometimes
more subt ly, somet imes in a more vi s ible way. I think that cont inued ef fort
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i s going to be frui t ful over t ime. I could never urge the panel that tha t 's
going to yie ld resul t s that are immediate and vis ible , but I think in many
ways they are doing these things now, and they would be wel l -advised to
cont inue.
It ' s also very helpfu l to the enforcement community where they can
provide a specif ic account of the ir experiences because the conversat ion
that the enforcers have with each other on some of these points over t ime
where t rus t i s developed provides a mechanism for providing addi t ional
observat ions.
The technical features that I would press for , again , I would press for
bet ter resourcing for the agencies . I think, to go to Tad 's example on
merger review, why are things so s low? MOFCOM star ted with 20 people .
Ten of those were profess ionals . They' re up to about 30 now. The agency
probably needs to be three t imes that s ize.
When you 're so smal l , the assembly l ine jus t can ' t move as quickly as
i t should be. So as a technical mat ter I 'd say why no t resource th is vi tal
funct ion in a more substant ial way.
COMMISSIONER TOBIN: That 's what China needs to do?
MR. KOVACIC: Yeah, yes . And I would say, I would say the
cont inued ef fort to say explain more about why you 're doing and what
you 're doing creates greater pressure internal ly to come up with coherent
explanat ions for decis ions taken. It p rovides the basi s for a debate over
t ime.
Again , I think the companies have been involved in doing this . So I
would say in many respects , they a l ready have a l i s t of measures that
pursued over t ime has promise.
COMMISSIONER TOBIN: Thank you.
CHAIRMAN REINSCH: Commissioner Talent .
COMMISSIONER TALENT: Thank you.
I rea l ly regret missing your tes t imony. One quest ion I wanted to ask
the three of you -- there are noncompet i t ive issues or factors bui l t into the
actual l aw, the Anti -Monopoly Law. And what I wondered was i s there a
body of law or precedent that 's fa i r l y understandable and rel iab le growing
up to define what those terms mean?
I mean i f a cl ient or somebody consul ts you and says , okay, I want to
do this merger or I want to do th is thing in China, would you or other
expert s fee l reasonably comfortable sayi ng, okay, wel l , here i t 's going to be
Problem A, B and C, and A, given how they've decided this and this , i t ' s
probably going to come out this way; and B is - -you see what I 'm saying?
The normal process . I 'm a lawyer mysel f . The normal process you 'd go
through based on precedents , fai r l y understandable and predic table
adminis t ra t ive rules or determinat ion, or would you jus t have to say, you
know, to th is point they' re s t i l l evolving , i t ' s been pret ty arb i t rary, you
know, I real ly can ' t tel l you?
MR. LIPSKY: I don 't think I would digni fy the sources as precedent or
a definable area of l aw. I th ink there is some degree of regulari t y in the
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way that the Chinese agencies behave that can provide some sense of
predic t ion, but i t i s very di f f icul t to predic t e ven re la t ive to other
jur isd ic t ions because they have in thei r law this protect ion of the nat ional
social is t economy.
It ' s di f f icul t to predict how that wi l l be interpre ted, and because given
the s t ructure of enforcement and the way things are run , somet imes the best
guidance you can give for any proposed acquis i t ion or proposed business
s t rategy i s to ask the cl ient what Chinese f i rm or agency would thi s hurt?
How can that be ameliorated or e l iminated? And that often leads to a
predic t ion of how th ings are l ikely to go in the legal process .
MR. KOVACIC: Yeah, I l ike Tad 's descrip t ion. There isn ' t a clear
specif icat ion in the tex t of the law about what these terms mean. There
aren 't formal precedents in the way that a l awyer would look to them, but
you learn f rom previous decis ions. You look at what they've actual ly done,
and I think there is a growing abi l i t y of outs ide advisers to take these
dif ferent data points and to come up wi th this t ype of analysis .
You have a bet ter idea of what the agencie s have done before as a
guide for what they' l l want now. You have a bet ter idea of who wil l
complain , to whom? Who wil l rai se object ions? How you get to them early?
How you make counterarguments to them?
In ef fec t , you have the development of the scien ce that is wel l
developed in this ci t y, which is of lobbyis t s , lawyers , advisors ,
Kremlinologis t s on the outs ide looking at the bui ldings to see what 's going
on, and you have an idea of what they' r e going to want and how to negot iate
going in . I think tha t ski l l i s much more heavi ly developed now than say i t
was even three years ago .
So that you s tar t coming up with the charts and the profi les that again
are wel l -known to those of us who l ive in this c i t y about how the regulators
are behaving, what they d o in di fferent ci rcumstances. In China, i t ' s not as
wel l -developed an art as i t i s in other count r ies , but I 'd say people are
catching up , catching up somewhat rap idly, going down the learn ing curve
to f iguring out what 's expected, what would be wanted, a nd how to go about
making the bes t case.
COMMISSIONER TALENT: I love your use of the term cr iminologis ts
with reference to people who t ry and understand Washington.
[Laughter . ]
COMMISSIONER TALENT: As a former member , I 'm not sure I l ike
i t .
COMMISSIONER BARTHOLOMEW: Kremlinologis ts .
COMMISSIONER TALENT: Oh, Kreml inologis ts .
MR. KOVACIC: But you wouldn 't say i t 's wrong.
COMMISSIONER TALENT: Well , I jus t said cr iminologis t s .
COMMISSIONER FIEDLER: Actual ly cr iminologis ts is just reducing
i t down to i ts --
COMMISSIONER TALENT: I was going to say I understand the
reference. Ma 'am, did you have any?
139
DR. WANG: I echo what Tad and Bi l l just said , and I al so want to add
that having a good compet i t ion s tory is absolutely necessary. In addi t ion to
that , we need more . We need to add. We need to f ind out who are the
s takeholders . In addi t ion to who this t ransact ion might hur t , we also want
to bring out a s tory who this t ransact ion may help so we wi l l have a good
s tory and to counter or balance wha tever i s out there. So i t i s more, more
than just a compet i t ion s tory.
MR. KOVACIC: I 'd jus t add that in the U.S . , by compari son , most
merger review and concerns of merger review are reso lved by se t t l ement ,
not by l i t igat ion. Li t igat ion is exceedingly rare. Maybe three , four cases a
year go into the courts . Everything el se takes place through negot iat ion
where there 's a t remendous amount of di scret ion to achieve dif ferent
outcomes.
Outside counsel and other advisors become proficient in col lect ing
those data points to see what they d id the las t t ime as a way of going in to
negot iate and to make predict ions about what you 're probably going to have
to give up the next t ime. Again, that mosaic of past experience, much more
l imited in China than i t i s he re , but a s imilar process , I think, i s beginning
to take place that provides , i f not what we would cal l p redictabi l i t y, at l east
less uncertainty.
COMMISSIONER TALENT: Well , jus t because i t ' s --you 're describing
a pol i t i ca l process . Just because that 's w hat i t i s doesn 't mean i t ' s a rbi t rary.
I mean there are understandings that - -and I ge t that . I guess my t ime i s up,
and I was la te anyway. So thank you.
CHAIRMAN REINSCH: Severa l of you have refer red in your
tes t imony to the fac t that there are three enforcement ent i t i es and not one,
and I think Mr. Lipsky had some recommendat ions about that .
Can any of you comment on the way the three in teract wi th each other?
Do they cooperate? Is one c learly super ior to the other two? Can you tel l
us anyth ing about sort of the internal , not internal inside -- the in teragency
dynamic , i f you wil l , o f how this is adminis tered?
MR. KOVACIC: They do coopera te . I would say the discussions
among them are rout ine, bu t I 'd suggest a universal theory, theorem about
pol i t ical science, which i s that when you take two or more publ ic agencies
and put them in the same pol icy domain , they don ' t always get along very
wel l . I would offer the United States as a good example of tha t .
CHAIRMAN REINSCH: I was get t ing to that . But g o ahead .
MR. KOVACIC: And indeed when the suggest ion is made to them
about s impli f icat ion , a response del ivered very pol i tely to Americans by the
Chinese is when you ra t ional ize your sys tem of two federa l agencies and
the delegat ion of au thori ty to al l 5 0 s tate governments , and you sort that
out , p lease do come back to us , and we ' l l be r ight behind you.
CHAIRMAN REINSCH: Do ei ther of the others want to make a
comment?
MR. LIPSKY: Well , you probably should take note of thi s unique
s t ructure that the la w establ ished because I remember seeing in the law th is
140
phrase, " they' re creat ing an an t i -monopoly commission under the State
Counci l . " Now that technical ly i s the ent i t y that actual ly adopts these
regula t ions and enforces these laws , narrowly speaking.
And I 've been told that that phrase "under the State Counci l " is a way
of giving the agencies a very heavy dot ted l ine back to the center . You
know, the State Counci l i s the senior day - to-day adminis t rat ive agency of
the nat ional government in China. It ' s a very powerful uni t , and i t sugges ts
to me that the Commission is a lways guiding the agencies , looking over i ts
shoulder at the S ta te Counci l , much the way the DG Compet i t ion must look
at the Commission that ac tual ly renders thei r decis ions .
Moreover, thi s same spl intering, local spl intering of author i ty that --
you know, Bi l l refer red to the fact that we have s tate ant i t rust laws . Wel l ,
the Anti -Monopoly Law expl ici t l y provides for delegat ion of the author i ty
of those three main agencies down to the pro vinces and the autonomous
municipal i t i es , the big ones l ike Bei j ing and Shanghai , as wel l as the
autonomous regions .
So they a lso have a s ta te and even a local enforcement s t ructure that is
in some senses even more, even a more cracked pane of glass than the
United States sys tem is . So that local and regional divers i t y ex is ts in thei r
system as wel l . So this is a very compl icated ques t ion, but keep in mind
that there are some very powerful inst i tut ions s i t t ing on top of these three
agencies , and i t makes you wonder whether a great degree of coordinat ion
might occur in dialogue with the higher levels rather than necessari l y
horizonta l ly agency to agency.
CHAIRMAN REINSCH: A good poin t . Dr. Wang, do you want to add
anything?
DR. WANG: I don 't have much to add to what Tad and Bil l said . What
I do want to make observat ion i s that in the conferences I go to China,
oftent imes I do see three agencies ' representa t ion at the same table ta lking
about whatever hot issues at this s tage . So they do want to show at l east
the appearance that they are heavi ly involved in what 's happening.
CHAIRMAN REINSCH: Okay. Thank you.
Now for a repr ise. Commissioner Shea. Oh, I 'm sorry.
COMMISSIONER BARTHOLOMEW: It jus t came up. Well , I 'm
l is tening to the three of you. Firs t , i t ' s unusual that we have so much
unanimity among our panel is ts . Usual ly we have a l i t t l e bi t of divergence
of views among our panel is t s , bu t I keep hearing what sounds to me l ike
equivalencies as you 're sort of making the case for what China i s doing, and
I just wondered , you know, do you bel ieve that the U.S . has a nat ional
indust r ial pol icy?
MR. KOVACIC: Absolutely.
COMMISSIONER BARTHOLOMEW: A nat ional indust ry pol icy? The
United States?
MR. KOVACIC: Yes. Defin i t ions would probabl y be helpful here and
maybe I should have asked f i rs t what do we mean by that?
COMMISSIONER BARTHOLOMEW: Well , I mean the Chinese
141
government has these f ive -year plans . They are a cent ral ized economy. Do
you bel ieve that our economies are the same?
MR. KOVACIC: We certainly don ' t have the degree of economic
cent ral izat ion. We cer ta inly don ' t have the ex tent of s ta te involvement , by
no means, but i f we asked does the government of the United States have
broad indust r ial ob ject ives which i t seeks to acc omplish through a variety
of di f ferent pol icy tools , I would say certain ly.
Would you disagree? On tax pol icy--
COMMISSIONER BARTHOLOMEW: Yeah, I mean I don ' t - -
MR. KOVACIC: R&D, educat ion .
COMMISSIONER BARTHOLOMEW: I, you know, usual ly people have
an a l lergic react ion when we talk about having a nat ional indust r ial pol icy
in this count ry because i t ' s anathema to f ree market capi tal i sm. So I guess
I just th ink that I don 't see China 's economic s i tuat ion , both i ts s t ructure
and i t s coherence and i t s p lan towards where i t 's going as being equivalent
to the United States and f ree market capi tal ism. So I 'm jus t t rying to
understand these equivalencies .
MR. KOVACIC: Maybe I 'm, again, s t ruggl ing with a phrase that is so
often used and so rarely defined in t rying to address the basic proposi t ions
you 've suggested. Are there fundamental ly d i fferent economic sys tems at
work? Fundamenta l ly d if ferent methods of governance and representat ion?
Unmistakably.
The number of s ta te -owned enterprises in the Un ited States , for
example, is s t r ik ingly few. We have the U.S. Postal Service . We have a
couple of power authori t i es , Bonnevi l le , TVA; Amtrak . You can ' t count
them on two hands . You only need one to come up with the ones that
mat ter . So the degree of s t ate involvement is dramatical ly less . The extent
of private ent repreneurship is dramatica l ly more important . So certainly no
equivalence there at al l .
But i s the government of the United Sta tes , th rough i ts Congress ,
through i ts execut ive branch, through i t s departments , i s i t involved in
some way in pursuing these broader economic pol icy object ives , and is the
mechanism of government used to pursue them at di f ferent t imes, I would
say cer ta inly yes . So i f indust r ial po l icy means those kinds of measures to
accomplish them, I 'd say we have one, but is the government 's role as
encompassing, as expansive and as deeply ingrained in the economic sys tem
as i t i s in China , certain ly not .
At the same t ime, is China changing? And, again , I pose my ques t ion,
which I d id to your col leagues before: who predicted in 1970 or in 1980
that the economy of China would look the way i t does today that there
would be the ex tent of rel iance on what might be cal led genera l ly a market -
based process? I don 't know many people w ho cal led that one . So, to me,
tha t says within a sys tem that s t i l l has some t remendous r igidi t ies and
l imitat ions , severe dif ferences f rom the U.S. , there 's a great di f ference
between now and then .
COMMISSIONER BARTHOLOMEW: Ms. Wang? Dr. Wang, any
142
answer?
DR. WANG: I don 't have any opinion on th is .
COMMISSIONER BARTHOLOMEW: Okay. Mr. Lipsky.
MR. LIPSKY: I think I would endorse Bi l l ' s remarks, and I think i t 's a
compliment to the sys tem that we general ly have an a l lergic react ion to
indust r ial po l icy. It seems l ike most of my adul t l i fe I l i s tened to
complain ts of various nature along the l ines of , wel l , when are we going to
have an energy pol icy?
Well , how about somebody, you know, invents horizontal dri l l ing and
turns the United Sta tes f rom the larges t net importer of oi l to the largest
producer of oi l in the world, you know, just wi thin a f ive or ten -year
period? How about tha t for an energy pol icy? Had very l i t t le to do with
government pol icy. In fac t , you might say i t occurred in spi te of
government pol icy.
So I 'd certainly agree with Bi l l that there are t remendous di fferences in
that regard between the U.S. and China.
COMMISSIONER BARTHOLOMEW: Thank you.
MR. KOVACIC: I would say fur ther , Commissioner , that our
indust r ial pol icy in many ways is des igned to create enabl ing condi t ions in
which this private investment mechanism can succeed . Where are some of
our most important investments? Educat ion , inf rast ructure asset s , basic
research and development of a t ype that ind ividual f i rms wi l l not support . I
would say the overwhelming emphasis of our investments have been in
these areas and, in many ways , to create what economis ts have cal led the
enabl ing envi ronment in which o ther forms , in which private act ivi ty can be
more s igni f icant .
When I use the term "indus tr ia l pol icy," and I mean saying do we have
one, to some extent , yes , we do. We make those kinds of investments to
fac i l i t ate the opera t ion of the market , but qui te fundamenta l ly the
government sees i t s role as the referee , not as the p layer on the f ield.
CHAIRMAN REINSCH: Okay. I can 't res is t adding a sentence to that .
I would agree that we have had one. We've had one s ince the Lincoln
adminis t ra t ion. These days i t ' s most ly d isguised as a nat ional securi ty
pol icy. We get a lo t of indust r ial favor i t ism, i f you wil l , pursued in the
name of developing indust r ies that have a secur i ty l ink. I t ake your o ther
poin ts as wel l .
I think our t ime i s up. You haven ' t a l l disagreed, but that ' s al l r ight . I
think you 've al l added so me important e lements to the overa l l picture , and
very ar t iculately, I might add, and with in t ime l imits , which is great . So
thank you very much for your cont r ibut ions . We appreciate i t , and we wil l
recess now unt i l 1 :45, when we ' l l reconvene for the las t panel .
143
PANEL III INTRODUCTION BY COMMISSIONER DANIEL M. SLANE
HEARING CO-CHAIR SLANE: Welcome back. In our f i rs t panel today,
our expert wi tnesses - - I 'm sorry-- in our f inal panel today, our expert
wi tnesses wi l l assess China 's progress in implement i ng meaningful reform
object ives relat ing to opening up fore ign investments and d iscuss the
potent ia l for China ' s planned reforms to create a more t ransparent ,
coopera t ive and fai r envi ronment for foreign inves tors .
Luci l le Barale is a vis i t ing professor a t Georgetown Universi t y School
of Law and i s a special i s t in the legal aspects of doing bus iness in China .
In pract ice for more than 25 years , she has advised fore ign companies in
China on di rect investments , mergers and acquis i t ions, as wel l as
technology l icensing, engineering and const ruct ion projects , di s t r ibut ion
and retai l ing operat ions , and the protect ion of intel lectual property r ights .
During her years in China, Ms. Barale took an act ive role in the
American Chamber of Commerce. She was elected p resident of AmCham
China in 1989 and later served as China Bus iness Commit tee chai r , Board
of Governors member, and chair of AmCham in Hong Kong.
Fol lowing Ms. Barale is one of our own, Dr . Josh Eisenman --welcome
back--who is an assi s tant professor at the Lyndon Johnson School of Publ ic
Affai rs a t the Universi t y of Texas at Aust in and a senior fel low for China
Studies at the American Foreign Pol icy Counci l .
Before joining the AFPC in 2006, Dr . Eisenman served for two -and-a-
hal f years as a pol icy analys t a t the U.S . -China Commiss ion . He has also
worked as a fel low at the New America Foundat ion and Ass is tant Di rector
of China Studies at the Center for the Nat ional In teres t , formerly The Nixon
Center .
Las t ly, we welcome Dr. Scot t Kennedy, a Deputy Di rector of the
Freeman Chair in China S tudies and Director of the Project on Chinese
Business and Pol i t i cal Economy at CSIS .
A leading authori ty on China 's economic pol icy and i ts global
economic relat ions, his research examines Chinese indust r ia l po l icy,
business lobbying, mult inat ional bus iness chal lenges in China , Chinese
part icipat ion in the global economic regimes, and phi lanthropy.
Dr . Kennedy was a professor at Indiana Universi t y for over 14 years .
From 2007 to 2014, he was Director of IU Research Center for Chinese
Pol i t i cs and Business , and he was founding Academic Di rector of the IU
China Off ice .
Again , thank you al l for being here . Each wi tness wil l have seven
minutes to present h is or her tes t imony. Ms. Bara le , we 'l l s tar t wi th you.
144
OPENING STATEMENT OF LUCILLE BARALE
VISITING PROFESSOR, GEORGETOWN UNIVERSITY SCHOOL OF LAW
MS. BARALE: Thank you very much. Thank you for invi t ing me. It ' s a
pleasure to be here today.
I have to admit that when I was f i rs t approached about thi s hear ing, I
had some reservat ions because I thought the t iming was premature . We
have been seeing some efforts to reform the government approval sys tem
for inves tments this year . It has primar i ly come from the S tate Counci l and
through the Nat ional Development Reform Co mmission , t rying to
s t reamline-- that ' s may be an overstatement - -but s t reamline the sys tem for
approval of projects for both Chinese and foreign investors , and then
NDRC, the Nat ional Development Reform Commiss ion, fo l lowing through
with some important regu lat ions las t May on that .
But we had heard nothing f rom the Minis t ry of Commerce. We'd heard
noth ing with regard to foreign inves tment reform, which is what we would
l ike to talk about today.
And then las t week, the Minis t ry of Commerce announced a ne w draft
Foreign Investment Law. This draft Foreign Investment Law, which has
been issued to the publ ic for comments , to sol ic i t comments for the
fol lowing month, would replace the three Foreign Investment Laws that we
have been using for foreign inves tmen t s ince 1979, for decades.
The Equi ty Joint Venture Law, the Cooperat ive Joint Venture Law, and
the Wholly Foreign Owned Enterpri se Law wil l be scrapped, and they wil l
be replaced by a new Foreign Investment Law, as proposed in thi s draft . So
there 's a lot of at ten t ion on this New Foreign Investment Law.
There are al so , wel l , f rankly, there are some exci t ing developments in
this l aw. The f i rs t that we might highl ight would be that China 's
pol icymakers and the drafters of this l aw are wil l ing to a l low that in some
cases , there wil l not be a need for government approval for foreign
investment .
They have put in thi s l aw something we thought we might never see
actual ly proposed , but the principle of nat ional t reatment has now been
int roduced, and th is pro posal involves nat ional t reatment for pre -ent ry in to
the market , not just post -en try. So provis ions relat ing to nat ional t reatment
have been in troduced, al though i t ' s a qual i f ied nat ional t rea tment , and we
need to talk a bi t about that .
But the proposal has been put forth that at l east for some types of
investments coming into China, government approval would not be
necessary. This is revolut ionary, a fundamental change in thinking, the
idea that the government and MOFCOM would be wi l l ing to s tep back f r om
the rule that they must approve, or lower levels of fore ign investment
authori t ies must approve, every investment on a case -by-case basis .
So there are some very exci t ing developments to talk about there , but
at the same t ime while we 're looking at wha t MOFCOM is propos ing and
foreign inves tment approval reforms involve , we have to keep in mind that
145
there is this paral lel t rack for investment approval , another channel cal led
"project approval . " And as I ment ioned in the s tar t o f my remarks ,
referr ing to what the State Counci l and the Nat ional Development Reform
Commission have been working on, they are reforming thi s sys tem
regula t ing the types of projects that need government approval , whether
with Chinese investment or foreign investment .
About a yea r ago, December 2013, State Counci l i ssued a new
catalogue on thi s , paring down the type of projects , the number of projects
tha t would need government approval . There are 13 ca tegories of projects
tha t need government approval regardless of the source of the investment ,
and at present category number 12 is foreign investment , and category 13 i s
outbound investment , but categories one to 12 are energy, t ransportat ion ,
agricu l ture, other t ypes of investment categor ies involving f ixed asset
investment , where government approval is requi red. One quest ion addressed
is whether approval is required by the cent ral government or provincial
government .
As we move into a new era of perhaps nat ional t reatment , at least
nat ional t rea tment in some instances , we wil l be more focused on some of
these o ther paral lel approval processes that wi l l cont inue to apply.
On another point , just to set up our d iscussion before I f in ish off , i s
the quest ion about what is meant by nat ional t reatment in the draf t l aw.
Nat ional t reatm ent , of course, would mean that fore ign investors and thei r
investments in China would be t reated in a manner that is no less than that
which is accorded to Chinese investors unless there are except ions -- and
there wil l be except ions . There is a proposal in the draft Foreign
Investment Law to establ i sh a catalogue of res t r ict ions - - there are various
t rans la t ions for th is , but appears to be a catalogue of specia l adminis t rat ive
measures for inves tments in f ields that are res t r icted, There wil l also be, of
course, a l is t o f prohibi ted investments .
This sounds s imilar to what we see in the Foreign Inves tment Guidance
Catalogue, but I think we might be seeing something else that ' s wi l l be
happening in th is ca talogue. There i s , as you know, a large port ion of
highly-regulated investment that wi l l l ikely cont inue to be subject to
foreign inves tment approval by MOFCOM, in addi t ion to project approval
tha t comes through the NDRC channel there.
But for those investments that wi l l fal l into the category of not being
rest r icted , or not being prohibi ted, these inves tments wil l be ab le to move
into China without a foreign investment approval by a government agency.
This opens up some exci t ing, I think some exci t ing benefi ts , which may
seem small to some of us in the beg inning. The fact that our cont rac ts may
not need to be reviewed, the choice of where di sputes are set t l ed may not
need government approval , whether i t 's a rbi t rat ion in China or whether i t ' s
a rbi t rat ion outs ide of China -- that 's where i t ' s o f ten preferred -- these sor ts of
issues can be decided between the bus iness partners and not subject to a
negot iat ion with government author i t i es . So i t ' s an encouraging change.
The other fundamental change involved here i s that not only wil l you
146
not need government approv al to get into some of these investments , you
won ' t need i t to get out of your investments , and the abi l i t y to move capi tal
in and out of inves tments and to f ind the most ef f icien t investments is also
a major development that is go ing to be bringing more f reedom to the way
foreign inves tment i s brought into China.
So at this early s tage, I th ink one of the things that we can talk about
today are some of the quest ions that we should be focus ing on as we look a t
this draft l aw and consider where the reforms in foreign investment sys tem
and the investment approval sys tem in general are headed. I look forward to
discussing these things wi th you.
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OPENING STATEMENT OF JOSHUA EISENMAN, PH.D.
ASSISTANT PROFESSOR, UNIVERSITY OF TEXAS AT AUSTIN, LYNDON
JOHNSON SCHOOL OF PUBLIC AFFAIRS SENIOR FELLOW FOR CHINA
STUDIES, AMERICAN FOREIGN POLICY COUNCIL
DR. EISENMAN: Thank you, Commiss ioner .
It ' s great to be back and to see so many old f r iends and faces . So i t ' s
also great to be nex t to Professor Scot t Kennedy, who was my professor and
taught me Chinese pol i t i cs in Bei j ing. So to me i t ' s a double honor.
So let me go ahead here and jump right in . I am probably not
going to speak on the same level of deta i l as some of my co -panel is t s . I 'm
going to speak a t perhaps a bi t o f a higher level of abst rac t ion, but I have
for you one condi t ion, three points , and two recommendat ions, and I 'm
going to t ry to summarize here, and , of course, you have my wri t ten
tes t imony.
The one condi t ion which I think many of us al ready know but i t ' s wor th
restat ing is that the Communis t Party of China wil l never adopt any pol icy
that weakens i ts pol i t ical control of China . Al l interact ions and negot ia t ions
and pol icies are bound under one phrase , and that phrase is "under the
Party's leadership."
And this is one condi t ion we must always bear in mind, I bel ieve , when
we look at China 's economic , pol i t i ca l and secur i ty relat ions. As i t pertains
to this hear ing, i t means that the only economic reforms that we can expect
are those that do not t hreaten the Party or , bet ter yet , enhance i t s cont rol . I
would not expect areas , progress in any areas that the Party bel ieves i t must
cont rol in order to maintain i ts pol i t ica l power. So that ' s our one condi t ion .
In terms of the poin ts , then , and this is more or l ess a summary of my
wri t ten tes t imony, of l ate , the Communist Party is making i t harder for
foreign f i rms to do business in China, whether thi s i s Microsoft , OSI Foods ,
or the myriad of other cases I 've l is ted in my test imony and that you 're we l l
famil iar wi th.
Perhaps U.S. Secretary of Commerce Pr i tzker said i t best l as t month
when she said to her Chinese in terlocutors in Chicago that , quote,
"concerns over i ssues l ike the sanct i t y of cont racts , t ransparency, rule of
law, intel lectual property protect ion, and other is sues are beginning to take
their to l l . Foreign companies need to know that they' re on an equal foot ing
with domest ic companies i f governments hope to at t ract the ir capi tal . "
And I think that s tatement real ly says i t al l , and I ' l l refer you to the
wri t ten tes t imony for further detai l .
The second point I want to make i s that China is ut i l iz ing i ts free t rade
zones and negat ive l is t approach to channel and l imit foreign investment
into selected geographic areas and to speci f ic sectors tha t i t p refers , and
this cont ras ts with the special economic zones of the 1980s that we 're al l
famil iar wi th which foretold of an opening to the world.
These f ree t rade zones represent a clois ter ing of foreign f i rms in select
areas and sectors , and I don 't expect i f I had to read tea leaves that they
148
wil l do much to help enhance fore ign access to the larger Chinese market .
Of course , his tory i s ye t to be wri t ten on that mat ter , but I do think that i t ' s
unl ikely. In fact , I would consider almost a s tep backwards in some ways .
And, in fact , China is wi l l ing, the Communist Party is wi l l ing, to
accept what we would consider market ineff icient outcomes in sectors l ike
telecom, software, computers and o thers where i t fee ls that the success of
foreign f i rms might threaten i t s pol i t ical interests . So pol i t i cs comes f i rs t .
Thi rd and f inal poin t to make is that China is giving increased access
to capi tal markets , and this is a very unique special part of the
Commission 's port fol io . I worked on i t mysel f actual ly when I was here
with Commissioner Robinson, but i t ' s now actual ly that we ' re seeing China
through the Shanghai to Hong Kong l ink and a future l ink between the
Shenzhen and Hong Kong exchanges giv ing new access to Chinese capi tal
markets .
Las t month, as of January 7 , the l ink has yet to be fu l ly exploi ted .
Only 25 percent of the bandwidth has been used and only s ix percent going
from the mainland to Hong Kong, but there 's upcoming f ixes that I go into
in my tes t imony, my wri t ten tes t imony, and th at process by March should
be evened out and adjus ted.
And so based on these three poin ts , and this one kind of overarching
theme, I have two recommendat ions or two ideas I 'd l ike to put forward .
The f i rs t i s wi th regard to capi tal markets . While r ight now the f low of
U.S . funds in to Chinese capi tal markets is very, very, very smal l , i t ' s just
begun, but l ike al l things that have just begun, we don ' t know where i t ' s
going to go , and so I would sugges t tha t the Commission keep an eye on
this .
I would hat e to see ret i rement funds, pension funds being invested in
large quant i t i es in China given the s t ructural problems that you al l know
qui te wel l . So i t would seem to me something that would be under the
Commission 's mandate to keep an eye on th is , and i f i t does begin to go up ,
and i f we do see people 's ret i rements going to s tate -owned f i rms on the
Shanghai Exchange via the Hong Kong l ink, tha t might be something to cal l
at ten t ion to .
The second point , in the las t two minutes , i s about ef fec t iveness of
dia logue that we have wi th China. American pol icymakers , l ike Americans
general ly, a re opt imist ic and bel ieve in their own capabi l i t y to change the
world and make i t a bet ter p lace. And this enduring opt imism and this can -
do spi r i t are who Americans are in many ways , but they have been
misplaced wi th regard to the Communist Party of China.
No amount of savvy dip lomacy or camaraderie among leaders or
pol icymakers can influence the pol icy d irect ion of the Communist Party of
China, which has one pr imary overri ding object ive: the complete control of
China and those areas i t claims.
U.S . pol icymakers should give up the old mission task of t rying to
change China, accept the Party for what i t i s , and move on f rom that point .
Today, thi s misunderstanding material iz es in the scores , hundreds of
149
dia logues we have with China, between 350 and 400 dialogues a year , more
than one a day, the cent ral idea being that we can make gains through these
increasing dialogues with the Communist Party on a myriad of topics .
Now, i t ' s here I would propose that the Commission undertake a
research pro ject to t rack and measure and evaluate the f ru i ts of each Track
1 U.S. -China dialogue, to help the U.S . taxpayer understand what is the
value, which are the valuable d ia logues that we want to keep and which are
not .
And then based on that , and thi s again would be my own personal view,
that wi thout prejudging the outcome of such an invest igat ion that those
judged as ef fect ive should receive the preponderance of the funds and those
dubbed as ineffec t ive should be mothbal led and restar ted when necessary.
Such a pol icy I be l ieve would help to incent ivize people on both s ides ,
the Chinese and the American s ide, to produce meaningful cooperat ion and
not to s imply keep the tea warm, as i t were , j ust in case a cr is is were
developed, but were to incent ivize them to del iver resul ts for the peoples of
both the United States and China.
Thank you very much.
HEARING CO-CHAIR SLANE: Thank you, Josh.
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PREPARED STATEMENT OF JOSHUA EISENMAN, PH.D.
ASSISTANT PROFESSOR, UNIVERSITY OF TEXAS AT AUSTIN, LYNDON
JOHNSON SCHOOL OF PUBLIC AFFAIRS SENIOR FELLOW FOR CHINA
STUDIES, AMERICAN FOREIGN POLICY COUNCIL
Evaluating China’s Foreign Investment Reforms
Testimony before the U.S.-China Economic and Security Review Commission
Hearing on “The Foreign Investment Climate in China”
January 28, 2015
By: Joshua Eisenman, Ph.D
Assistant Professor, LBJ School of Public Affairs, University of Texas at Austin
&
Senior Fellow for China Studies, American Foreign Policy Council
Summary:
• The only economic reforms we can expect are those that do not threaten the Communist
Party of China (CPC) or, better yet, enhance its control. Do not expect progress in areas
that the Party believes it must control in order to maintain its political power.
• China’s new more restrictive political environment has forced economic policymakers to
think creatively about how to liberalize the economy in ways that do not jeopardize the
CPC’s hold on political power.
• China has been making it harder for foreign firms to operate in the mainland by
disproportionally targeting them in crackdowns on corruption, food safety, etc.
• China appears to be transitioning from an FDI-focused approach to foreign investment
and toward a more capital market-based approach centered on the Shanghai and
eventually the Shenzhen Exchanges.
• China appears to be using the Free Trade Zone (FTZ) scheme in Shanghai (and soon
Guangdong, Fujian and Tianjin) to maintain access to foreign technology transfers,
marketing expertise, and intellectual property, while cloistering foreign firms into select
geographic areas and sectors that it can control, benefit from, and, if necessary, easily
restrict.
• The CPC appears to have successfully manipulated the negative list approach to its
advantage; using it to win foreign partners and governments’ acquiescence to Party
control over select sectors. In this way the CPC has accepted and applied an ostensibly
free trade mechanism to bolster and legitimize its political control.
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• China is relaxing its capital controls by making it easier to trade the yuan and for Chinese
firms operating abroad to repatriate foreign exchange. This is necessary to allow for more
types of Chinese firms to expand investments abroad. The U.S. remains China’s top
destination for outward FDI.
Introduction:
“We shall proceed with reform and opening up without hesitation,” China’s President and CPC
General Secretary Xi Jinping told the members of the Politburo Standing Committee at a
symposium marking the 110th anniversary of the birth of Deng Xiaoping in late August 2014.
These comments are not surprising. Since he assumed power in 2012, Xi has consistently
advocated an agenda purported to continue the “reform and opening up” policies initiated under
Deng. With an eye toward giving market forces a “decisive role” in the economy and “rectifying
the relationship between markets and the state,” Xi’s campaign includes a call to reduce
government meddling in the economy, a more level playing field for private sector firms to
compete with privileged state-owned enterprises (SOEs), and promises to allow enterprises and
individuals to invest more freely overseas.
Xi’s reform agenda was publicly affirmed last November at the third Plenum of the 18th
Congress of the CPC Central Committee; an occasion compared by many to the celebrated third
plenum in December 1978 that laid the groundwork for Deng’s historic reform campaign. Now,
as then, the paramount leader seeks to strengthen CPC rule and marketize the economy by
overcoming “vested interests” that produce inefficient outcomes. Now, as then, entrenched
interests resistant to change include a web of central government ministries, provincial and local
governments, powerful families, and state owned enterprises (SOEs). This time, however, the
difference is that China’s leaders have not encouraged more foreign competition in the domestic
market; instead they are pursuing a strategy that includes the channeling of foreign investment
into Free Trade Zones (FTZs), controlled expansion of select foreign investment via Chinese
capital markets, the expansion of outward FDI and the establishment of ways to repatriate profits
back to China.
Background: “Opening up” to Foreign Investment
It is widely acknowledged in China today that market-based competition, in principle, can help
ensure more efficient outcomes. This assumption was at the heart of Deng’s economic reform
strategy that sought to gradually “open up” China’s market to foreign firms. Throughout the
1980s, a decade-long political struggle pitted radical reformers against powerful entrenched
interest groups, and was only decided after Deng’s famous 1992 Southern Journey. Similarly, in
the late 1990s and early 2000s, Premier Zhu Rongji used WTO membership to successfully
create new pro-reform constituencies that counterbalanced reactionary conservative forces that
maintained control over the means of production in several key economic sectors. The fairer
treatment of foreign firms within the China market proved a powerful cudgel that Deng, Zhu and
other reform-minded leaders used to realize reform over the din of powerful and deep-rooted
opposition forces within the CPC.
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“Opening up” to foreign investment was the key concept behind both Deng’s Special Economic
Zones and Zhu’s drive for WTO accession. It was an essential ingredient in China’s recipe for
successful reform, one that both improved Chinese firms’ competitiveness by forcing change
upon SOE managers and attracted precious foreign technology and capital into the country. As
noted above, Xi - in keeping with this tradition - has also made pronouncements suggesting that
his administration will adopt an “opening up” strategy. During last month’s 25th annual U.S.-
China Joint Commission on Commerce and Trade session, Vice Premier Wang Yang reassured
U.S. firms that: “China has not slowed the pace of reform and opening up, and the investment
environment is not tightened.”1
The current logic for continuing a strategy of increased opening to foreign competition was set
forth by Liu He, a chief economic advisor to Xi, in a 2010 interview with Caixin magazine:
“Domestic drive often needs to be activated by external pressure. From the perspective of
China’s long history, a unified domestic drive and external pressure has been key to success.” In
an effort to harness this “external pressure” to push Xi’s reform package leaders at a politburo
meeting on August 27, 2013 called for a “full mobilization all positive factors inside and outside
the country to form a great cohesive power for promoting reform.”2
The Third Plenum was announced as an ambitious, longterm undertaking intended to “allow
market forces to play a decisive role in the economy.”3 Nevertheless, a report from the Center for
American Progress noted that: “Even if the Third Plenum and related reforms are implemented
fully as announced, China’s economy will still operate with broad state involvement in
ownership, finance, and authority over key economic decisions and prices.”4 Thus, it is not
surprising that the only economic reforms we can expect are those that do not threaten the Party
or, better yet, enhance its control. Conversely, we should not expect progress in areas that the
CPC believes it must keep control over in order to maintain its political power.
Recent Developments:
1. Tightened Restrictions on Foreign Firms and Technology in China
President Xi has not been enthusiastic about bringing foreign pressure to bear on China’s SOEs.
In 2009, he referred to SOEs as “an important foundation of Communist Party rule” and in
March while speaking to the Shanghai delegation to the National People’s Congress (NPC) he
said, “deepening the reform of SOEs is a major task; not only should SOEs not be weakened,
they must be strengthened.” These comments were accompanied by an increasingly less friendly
investment and operational climate for foreign firms operating in China. In 2006, China came to
the end of a five-year schedule of market-opening measures it had pledged upon entrance to the
1 Wohl, Jessica. “U.S., China aim to talk more on Biotech” Chicago Tribune. 17 Dec 2014. 2 刘鹤2010年对财新《新世纪》杂志表示："从中国长期历史的进程来看，外部压力和内部动力相统一是事物成功的关键，内部本身的动力常常需要外部压力来激."Xi introduced Liu He to then U.S. National Security
Adviser Tom Donilon in the fall of 2013. Xi said: “This is Liu He. He is very important to me.” See Davis, Bob.
“Meeting Liu He, Xi Jinping’s Choice to Fix a Faltering Chinese Economy,” Wall Street Journal. 6 October 2013. 3 Yao, Kevin, and Ben Blanchard. "Fearing Graft Probes, Chinese Officials Shun Spotlight, Seek
Retirement." Reuters.com. Reuters, 8 July 2014. 4 Hersch, Adam. "Assessing China's Economic Reform Agenda." Americanprogress.org. Center for American
Progress, 1 May 2014.
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WTO. After the WTO-mandated reforms expired, foreign firms began to complain of an increase
in various discriminatory practices, including more difficulty in getting licenses and approvals,
and a less friendly attitude from Chinese officials and partners. But while pressure on foreign
firms began to rise under Xi’s predecessor, it has reached a crescendo over the last two years
with foreign firms regularly being excoriated in the Chinese official press and provincial
agencies arresting and detaining executives.
In some cases, like that of meat distributor OSI International in Shanghai, entrenched domestic
interest and local authorities appear to have made it far more difficult for foreigners to do
business in China by clamping down on their operations and employing innovative
discriminatory tactics to restrict their ability to conduct business.5 From Microsoft in the tech
industry to OSI International in the food and agriculture sectors to Chrysler in the auto space,
U.S.-based companies across the board are being targeted. These come despite numerous high-
level statements declaring just the opposite, most recently last month from Vice Premier Wang in
Chicago.6 According to Deutsche Bank, more than 130 reform announcements occurred between
the Third Plenum and October 2014. Despite the positive rhetoric from Beijing, the targeting of
foreign interests in China continues apace. Beijing is essentially saying one thing and doing
another such that one year after the Third Plenum, despite extensive government action in some
areas, foreign firms are consistently saying that it has become increasingly difficult for them to
do business in China. As U.S. Secretary of Commerce Penny Pritzker noted last month:
“Concerns over issues like sanctity of contracts, transparency, rule of law, intellectual property
protection and other issues are beginning to take their toll. Foreign companies need to know they
are on equal footing with domestic companies if governments hope to attract their capital.”7
These views echo those of the European Union Chamber of Commerce in China, which has
declared an end to the ‘golden age’ of foreign business in China, and Transparency International
which bumped China 20 spots to 100 on its annual ranking of 175 countries.8
The uncertain business environment and a lack of transparancy have made longterm business
planning difficult, thus engendering a “wait and see” approach among some foreign investors.
During a visit to Hong Kong this month Nitin Nohria, dean of the Harvard Business School,
explained the rational behind this approach: “For the last 10 to 15 years there was a certain
vector to how China was developing, which was export-driven growth; multinationals all coming
here; a government that was very encouraging of letting them get business done. There seems to
be a shift, and people are trying to understand what this shift implies.”9 This sentiment is being
reflected in investment flows to and from China. Earlier this month China’s Ministry of
Commerce said the growth of foreign direct investment into the country slowed last year, rising
just 1.7 percent from 2013 to $119.6 billion.10
China is also in the process of purging all foreign technology from banks, the military, state-
owned enterprises and key government agencies and replacing it with Chinese software and
5 Sachdev, Ameet. “Another Setback in China for Aurora-based Meat Supplier” Chicago Tribune. 6 January 2015. 6 Wohl. 7 Wohl. 8 "China Slips in Transparency International Corruption Index - FT.com." Ft.com. Financial Times, 3 Dec. 2014. 9 Quoted in Goughjia, Niel, “To Invest, or Not, as China Shifts” The New York Times 20 January 2015. 10 Goughjia.
154
servers by 2020. The plan, which is justified by national security concerns, is an intentional
move by the Xi administration away from foreign suppliers. Microsoft Windows is being
replaced with a homegrown operating system called NeoKylin from China’s Inspur Group Ltd
and foreign servers are being swapped for those made in China. In September, the China
Banking Regulatory Commission ordered banks and finance agencies to dedicate at least 5
percent of their IT budgets to ensure that at least 75 percent of their computer systems were “safe
technology” by 2019. U.S. companies operating in China’s IT sector are vulnerable including
Cisco Systems Inc., International Business Machines Corp., Intel Corp. and Hewlett-Packard Co.
Last year, regulators pursued anti-trust probes against Microsoft, raided the firm’s China offices
and banned Windows 8 from government computers.11
Increased control over foreign firms operating in China and supervision over their investment is
not entirely unexpected, however. It reflects a “transformation in the country’s strategic
thinking,” as Wang Jisi, Dean of the School of International Studies at Peking University, wrote
in the March/April 2011 issue of Foreign Affairs. According to Wang, China appears to be
focusing on sustaining “the country’s high growth rate by propping up domestic consumption
and reducing over the long term the country’s dependence on exports and foreign investment.”12
There are some exceptions, however. In November, the Ministry of Commerce and the Ministry
of Civil Affairs of China jointly issued an announcement seeking to encourage foreign
investment “to set up for-profit senior care institutions in China, in order to promote the healthy
development of China’s domestic senior care services industry.” As China’s population ages,
senior care services are suffering from supply shortages that experienced foreign firms can help
address: officially, the number of citizens over 60 years of age in China reached 194 million at
the end of 2012, and is expected to reach 243 million in 2020 and exceed 300 million in 2025.13
Parcel delivery is another area where there are signs of liberalization. The State Post Bureau has
recently approved Yamato (China) Transport Co Ltd, OCS Overseas Courier Service (Shanghai)
Co Ltd and Kerry Logistics Co Ltd. But the impact of liberalization in this sector is likely to be
minimal given the already stiff competition and low prices. There are more than 35,000 express
delivery companies operating in China, including FedEx and UPS, and some can ship packages
hundreds of miles in the same day for as little as two yuan.14
2. Channeling Foreign Investment using FTZs and the ‘Negative List’ Approach
After years of U.S pressure China’s decision to move from a ‘positive list’ to a ‘negative list’
approach was widely haled as a diplomatic victory in Washington. With the announcement of the
Shanghai FTZ (SFTZ), Beijing began the negative list approach to regulate foreign investment.
Instead of classifying industrial sectors as ‘encouraged,’ ‘permitted,’ ‘restricted,’ or ‘prohibited’
this approach specifies only those areas in which foreign investment is ‘restricted’ or
11 Yang, S., Zhai, K., Culpan, T. “China is Planning to Purge Foreign Technology and Replace With Homegrown
Suppliers” Bloomberg News. 18 December 2014. 12 Jisi, Wang. "China's Search for a Grand Strategy." Foreignaffairs.com. Foreign Affairs, Mar.-Apr. 2011. 13 Dai, D., Qin, M., Kim, M. “China Encourages Foreign Investment in Senior Care Services” National Law Review.
7 January 2015. 14 Blanchard, Ben. “China Approves Three New Foreign Courier Firms -Xinhua” Reuters. 31 December 2014.
155
‘prohibited.’ The key distinction between the negative-list approach and the restricted investment
market access that China enforces outside the zones is that firms that invest in the zone are
supposed to receive a more predictable and expedited document approval process. They are
promised first access to investment incentives, such as expedited administrative decisions for
investment and lower levels of required capital to open a business. All told, however, foreign
investment in FTZs remains subject to a government approval process – albeit a less
bureaucratic, expedited one.15
The CPC appears to have successfully manipulated the negative list approach to its advantage;
using it to win foreign partners and governments’ acquiescence to Party control over select
sectors. In this way the CPC has accepted and applied an ostensibly free trade mechanism to
bolster and legitimize its political control.
The initial “negative list,” released in 2013, disappointed foreign investors. This dissatisfaction,
slow progress and Li’s absence from the SFTZ’s opening ceremony led some American
observers to note that the scheme had “failed to deliver meaningful concessions for investors.”16
According to the managing director of China Market Research Group in Shanghai: “It’s great
talk by [Premier Li Keqiang] and a lot of senior government officials, but there’s no execution.
Nobody knows what you can do.”17 Perhaps in response, in June 2014, the number of restricted
industries and activities for foreign investment was reduced from 190 to 139 and in November
2014, the National Development and Reform Commission released a new draft of the Catalogue
Guiding Foreign Investment. Changes in this latest draft, which was open to the public for
review until December 3, include reductions in the number of restricted sectors for foreign
investment, the number of industries limited to only joint ventures and partnerships, and the
number of industries that required a Chinese majority stakeholder. The proposed revised
Catalogue also retains the same foreign ownership caps introduced in the 2007 Catalogue.
To date investing in the SFTZ has served primarily as a hedge for foreign firms based on unclear
future promises, as one strategist with Silvercrest Asset Management explained: “A foreign
company might want to establish some kind of presence in the SFTZ, so that if some day actually
there’s a rule that allows you to do something interesting, you’re there.”18 According to the
American Chamber of Commerce in Shanghai, by September there were 12,226 companies
registered in the SFTZ of which only 1,677 were foreign firms.19
To address lackluster interest among foreign investors in the SFTZ, Li, the scheme’s key backer,
visited the site in September and “urged government officials to push through new policies.”20 Xi
himself has endorsed FTZs, first at the Third Plenum and again during a meeting with the
Shanghai NPC delegation in March. More recently, on December 12, the State Council
announced a “new round of high-level opening,” and its intention to establish three new free-
trade zones “replicating” the experience of the Shanghai Zone in Guangdong, Fujian and Tianjin.
15 Hersh. 16 Martin, P., Cohen, D. “Inside Xi Jinping's Reform Strategy” The National Interest. 20 March 2014. 17 Sigalos, MacKenzie, “The Shanghai Free Trade Zone is a dud,” CNN 12 October 2014. 18 Baccam, Veomayoury. “Shanghai FTZ Promises New Reforms and Vows to Further Trim Negative List.” Insight
(American Chamber of Commerce). 29 September 2014. 19 Baccam. 20 Tiezzi, Shannon. “Can China Save the Shanghai Free Trade Zone?” The Diplomat. 20 September 2014.
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The announcement also said the SFTZ would continue to shorten its “negative list.”21 It remains
to be seen, however, if FTZs, the Xi administration’s flagship “opening up” policy project
coming out of the Third Plenum, will produce tangible results in the reduction of tariff and non-
tariff barriers. In sum, the consensus appears to be that the SFTZ is moving forward in fits and
starts and that the fast-changing rules have created confusion about what is actually permitted.
3. Expanding Foreign Investment in Chinese Firms via Capital Markets
There appears to be a transition from the traditional types of foreign investment in China toward
foreign investment via capital markets. In November, China launched the Shanghai-Hong Kong
Stock Connect trading link, which opened up 568 Chinese companies valued at $2 trillion to
foreign investors via Hong Kong. Before the link, only a select group of foreign institutional
investors with special government permission were able to trade mainland-listed stocks.
The Stock Connect program, which took months to develop, was launched with fanfare with a
week’s notice.22 During the first month, however, the link was underutilized. Under the scheme,
the daily limit on investment bound for Shanghai is 13 billion yuan ($2.1 billion) and for Hong
Kong-bound investment it is 10.5 billion yuan. But as of January 7, foreign buyers had filled
only about 25 percent of the quota to buy mainland shares and 6 percent of the quota for Hong
Kong stocks.23 One reason Hong Kong has suffered is because a minimum investment amount of
500,000 yuan ($80,405) is required – far more than most non-institutional investors can invest.
Furthermore, hedge funds wanting to sell holdings of Shanghai-listed shares are required to
deliver the shares to banks’ brokerages before 7:45 am on the day of the sale – an idiosyncrasy
that exists in no other major stock market. The result has been low demand with the bulk of
activity coming from short-term speculative investors, rather than from mutual funds, pension
funds and private banks – as Beijing been hoped.24 To address this problem this month the HKEx
announced plans to launch a system fix in March that would allow custodians, which hold stocks
on an investor’s behalf, to open a separate account in the investor’s name. HKEx has reassured
investors they retain ownership of shares until they are sold, although legal opinion differs over
whether investors could enforce their claims should the HKEx’s clearing house go bankrupt.25
Furthermore, the HKEx is working with China’s Shenzhen Exchange to develop a similar link
that would allow foreign investors access to some of China’s more dynamic private companies in
the technology and health-care industries. The ChiNext index of small and medium size
companies, listed in Shenzhen, has more than doubled over the past two years fueled by
speculation about China transition to an economy driven by domestic consumption rather than
investment and exports. The HKEx-Shenzhen link is set to be tested next month and launched as
early as March.26
21 Yao, Kevin. “UPDATE 1-China to set up three new free trade zones” Reuters. 12 December 2014. 22 Hunter, Gregor S. “Money Surges Into Shanghai Stocks” The Wall Street Journal. 17 November 2014. 23 Zhang Shidong. “Shenzhen Studies Hong Kong Tie-Up as Shanghai Link Boosted” Bloomberg News. 7 January
2015. 24 Chatterjee, Saikat. “China’s Landmark Hong Kong-Shanghai Stock Link Has Not Been Nearly As Successful As
Hoped” Reuters. 21 December 2014. 25 Price, Michelle. “Hong Kong Stock Exchange Seek to Reassure Investors over Shanghai Trading Link” Reuters. 7
January 2015. 26 Zhang.
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Last month, the China Securities Regulatory Commission (CRSC) released draft guidelines that
proposed allowing foreign investors and brokerages to trade some futures contracts, granting
them access to a historically volatile – although large and potentially lucrative – market. The
CSRC said the initiative is “necessary” to bring in foreign institutional investors to reform its
commodities futures markets and bring domestic markets in line with international practices
through improved risk control and pricing.27 Like the Shanghai-Hong Kong link, this is another
effort to draw in investment from abroad to improve the liquidity and predictability of domestic
capital markets.
4. Outbound FDI and Profit Repatriation
Previously restricted to sovereign entities such as China Investment Corp., Beijing now allows
outbound foreign investments by private equity firms, financial conglomerates, insurance firms,
and other financial players such as Fosun International. Last year, according to Rhodium Group,
financial investors accounted for 22 percent of China’s outbound mergers and acquisitions
(M&A) value, twice as much as the average of the previous five years. Despite, this increase,
however, Rhodium found that in 2014, China’s foreign M&A acquisitions dropped 13 percent to
$53 billion a trend it attributed to “a sharp drop in natural resource asset buying.”28
There are large disparities in the estimates of total Chinese outward investment. According to
China’s Ministry of Commerce, 2014 witnessed an 14.1 percent increase to $102.9 billion.29 The
American Enterprise Institute (AEI), by contrast, reported total outbound Chinese investment
had risen only 0.7 percent to $84.4 billion. AEI also reported that Chinese investment in America
setting a new record in 2014 and for the third year in a row the U.S. extended its lead as China’s
largest recipient country. Over the past decade, the U.S. has received more Chinese investment
than any other country – $78 billion.30
The freer repatriation of foreign capital is an essential component of the larger liberalization of
outward Chinese investment that occurred in 2014. Most recently, beginning this month the State
Administration of Foreign Exchange (SAFE) will no longer require Chinese firms that go public
abroad to get approval to remit foreign exchange raised in their listings. This step toward
relaxing inward capital flows means overseas listed firms need only register their IPOs or other
fund-raising activities with the foreign exchange authorities and can then freely send funds
home. The new rules also include amendments that make it much easier for overseas listed
companies to send back foreign exchange surpluses. In another move to permit freer flow of
foreign exchange and relaxing restrictions on yuan trading, this month SAFE published new
rules giving banks leeway to short dollars by replacing daily caps on banks’ foreign exchange
positions with weekly limits.31
27 Shen Hong. “China May Allow Foreigners to Invest in Futures” The Wall Street Journal. 31 December, 2014. 28 Shih, Toh Han. "Rhodium Says China's Cross-border M&A Falls 13 Pct to US$53 Billion in 2014." Scmp.com.
South China Morning Post, 8 Jan. 2015. 29 Goughjia. 30 Shih. 31 Sweeney, P., Lu Jianxin. “China eases rules for overseas listed firms to send foreign exchange home” Reuters 31
December 2014.
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Conclusions:
• Beijing is restricting the presence of foreign firms in China and undermining their ability
to apply real economic pressure to SOEs in ways that could reduce the Party’s control
over the economy. The goal is to exploit foreign firms’ capital, technical innovations and
marketing techniques, while preventing the emergence of a true free market for foreign
products in most of the country.
• By pushing foreign investment towards its four designated FTZs, China seeks to channel
it into those geographic areas the party prefers. Similarly, the negative list approach
continues China’s tradition of channeling FDI away from sectors that the CPC sees as
politically sensitive. Such policies are more reminiscent of the open ports established in
the 19th century to contain and limit foreign influence than the Special Economic Zones
established by Deng Xiaoping during the 1980s that were intended to expand it.
• By granting foreign investors increased access to Chinese equities and futures via state-
controlled markets and banks (rather than through FDI and joint enterprises as had been
the case) Beijing both maintains control over the flow of foreign investment and can take
advantage of those institutional investors that had been wary of investing directly in
China due to the aforementioned risks associated with conducting business operations on
the mainland.
• Reduced barriers to foreign entry into China’s capital markets provide new revenue
streams, increase market liquidity, and improve domestic firms balance sheets. But the
door swings both ways, and the same system that allows overseas portfolio money in may
later be a conduit for investors, foreign and Chinese alike, to escape during rough times.
In short, contagion becomes both more likely and more serious as China expands foreign
access to its capital markets. Similarly, the more foreign institutional investors become
invested in Chinese firms, the more foreign markets become susceptible to contagion risk
from China.
• The CPC seeks to contain and limit the domestic political externalities it associates with
foreign investment, while keeping foreigners (along with their liberal ideas, religious
values, and perceived security threats) limited primarily to a select number of sectors and
geographic regions.
• China is working to expand the number and type of firms that can invest abroad and
improve their ability to repatriate profits. Although financial firms accounted for a larger
percentage of overseas Chinese M&A investment in 2014, China’s total M&A fell largely
due to a reduction in purchases of natural resource products. There are large disparities
between the official and AEI estimates of China’s total outward FDI for 2014.
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OPENING STATEMENT OF SCOTT KENNEDY, PH.D.
DEPUTY DIRECTOR, FREEMAN CHAIR IN CHINA STUDIES AND DIRECTOR,
PROJECT ON CHINESE BUSINESS AND POLITICAL ECONOMY, CENTER FOR
STRATEGIC AND INTERNATIONAL STUDIES
DR. KENNEDY: Good afternoon. It ' s an honor to appear before the
Commission today. I spoke before the Commission in 2007 so things must
have not gone horribly wrong because you 've invi ted me back , and i t 's an
honor obvious ly to be s i t t ing next to Professor Eisenman and my o ther co -
panel is t .
I 've been asked to speak about how China 's ongoing eco nomic reform
effor ts af fect the foreign investment cl imate. So my bot tom l ine message is
twofold: China 's economic reform effor ts are serious and comprehensive
and consis tent wi th the in teres ts of fore ign investors , but there are severa l
pol i t ical and economic factors tha t suggest that whi le China 's foreign
investment cl imate wil l cont inue to improve, China is not headed toward a
pure ly f ree market economy where government s imply act s as the provider
of publ ic goods and the dispassionate referee ensuring f ai r compet i t ion .
Anyone hoping for that scenario would be , to paraphrase Samuel
Becket t , "Wait ing for Godot ." American business and the U.S . government
need to maintain a real is t ic at t i tude about what is possible so as to avoid
creat ing overly opt imist ic expectat ions that would then leave them
disappointed .
I 've submi t ted wri t ten tes t imony to the Commit tee that explains my
posi t ion in deta i l , and let me br ief ly summarize those key poin ts here .
In broader his torica l perspect ive, China 's economic reforms h ave been
amazingly successfu l . S ince 1978, the count ry has had higher growth for a
longer per iod of t ime than any count ry in hi s tory. In the process , foreign
indust ry has benefi ted immensely through t rade and investment , bu t China 's
success has come at a high cost , ex tensive was te , corrupt ion , inequal i t y and
pol lut ion that we can al l see , feel , b reathe , and smel l any t ime you 're in
China.
Now there is wide consensus in China that the count ry's development
model needs to be changed in order to avoid fa l l ing into what 's been cal led
"the middle -income t rap ." Chinese Pres ident Xi J inping and Premier Li
Keqiang appear to agree with this analysis , and s ince they came to power in
late 2012, they have been pushing forward a wide -ranging bluepr int for
reforming the economy and the count ry' s governance inst i tu t ions.
Over the pas t two plus years , they have issued and begun to implement
a long l is t o f reforms, including l iberal iz ing the f inancial sector ,
s t reamlining business l i censing and regula tory approvals , f iscal reform for
the cent ral and local governments , and greater penal t ies for pol lut ion ,
among others .
They've al so begun to focus on reforming s tate -owned enterprises by
al lowing some private investment in previously banned sectors and
changing the compensat ion sys tem for SOE execut ives . There are current ly
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113 cent ra l SOEs, but I expect by the end of next year , there wil l be about
hal f that many as reforms go forward.
Final ly, as you 've heard, there have been further s teps , many s t i l l in
the draft s tage , to l iberal ize foreign t rade and investment .
Now i f China were to adopt and ful ly implement everything past and
on the drawing board, we 'd be wi tness to a watershed in China 's economic
governance. But based on past experience and cer ta in core fea tu res of
China 's pol i t i ca l economy, i t would be naive to expect a rapid,
s t raight forward and ful l adopt ion of these pol icies . Instead , gradual ,
incrementa l and par t ial movement in many areas i s far more l ikely.
And let me explain why. Fi rs t , this l eadersh ip is wel l aware of China 's
economic problems and the need for change, but they' re not economists
from the Universi t y of Chicago or the Universi t y of Texas or Georgetown.
They are pol i t i cians . They are not only t rying to promote growth but al so
protect t he leadersh ip of the Communist Party as we 've heard and expand
China 's internat ional influence .
So they' re giving a greater hand to the market , but they' re never going
to take thei r hands ful ly of f the wheel .
Second, al though Xi J inping has amassed sub s tant ial power, China 's
pol icy process i s s t i l l highly incrementa l . Key pol icies are increasingly
being set in Party o rgans that Xi J inping controls , but the government
bureaucracy is s t i l l highly influent ial and bent on ensuring they' l l remain
relevant .
They s t i l l have the green l ight to pursue indust r ial po l icies of al l
kinds, and they' re al so grasping for new reins of authori ty. This part l y
explains why the bureaucracy has embraced the Anti -Monopoly Law.
Beyond Bei j ing, local governments are toeing t he l ine on the an t icorrupt ion
campaign , but they have been less responsive on various economic reforms.
They're wai t ing to be compensated for thei r lost benef i ts that they've bui l t
up over the las t 15 to 20 years under the current sys tem.
Outside the s ta te, you have a whole complex of s takeholders and
interes ts t rying to shape pol icy in a wide variety of di rect ions, some
seeking greater l iberal izat ion, others hoping to pro tect the ir privi lege
posi t ions. This further encourages an ebb and f low dynamic and two s teps
forward , one s tep back, and sometimes one s tep forward and two s teps back.
Navigat ing this process is no easy task even for a leadership as
powerful and determined as this one .
Thi rd , the internat ional sys tem has been an importan t source for
encouraging, faci l i t at ing and in some ways requir ing China to l iberal ize
their economy. WTO ent ry was a watershed, and WTO membership has
been cr i t i cal for negot iat ing addi t ional l iberal izat ion measures and
addressing areas of backsl iding on China 's commit ments .
At the same t ime, the comprehensive nature of the in ternat ional t rade
order isn ' t matched in o ther areas of the internat ional sys tem. Norms and
rules re la ted to capi tal f lows, prudent ial banking, foreign exchange,
compet i t ion pol icy and cyber , to name a few, are far weaker and less
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ent renched.
In her wri t ten tes t imony, FTC Commissioner Maureen Ohlhausen
ment ioned the In ternat ional Compet i t ion Network. But the ICN is a
voluntary group that puts forward general guidel ines about compet i t ion
pol icy. It i s not a ful l -f ledged governance regime. The l imited nature of
internat ional ru les in many areas means that l imited ex ternal pressure or
guidepos ts and models ex is t that could provide a clearer path for China .
Fourth , and las t l y, the f inal factor tha t makes an uneven t ra jectory of
economic reform highly l ikely is the evolving s tatus of fore ign businesses
in China and the relevance of the global economy to the country's overal l
economy. China has long been the top dest inat ion of foreign inves tment in
the developing world but foreign invested f i rms account for a decl ining
share of the economy.
For example , their share of to ta l f ixed investment has fal len from a
high of 12 percent in 1996 to 4 .4 percent in 2003 to only 0 .9 percent of
total inves tment in 2013.
The picture i s s imilar on the t rade f ront . Total t rade was equivalent to
65 percent of the economy at i t s peak in 2006, and that f igure has
consis tent ly fa l len and was less than 42 percent 2014.
So al though Chinese f i rms wil l cont inue to be deep ly dependent on
exports and imbedded in global protect ion networks , foreign t rade and
investment wil l inevi tably be a decl ining share of China 's growing
cont inental s ize economy. And as a resul t , the calculus of China 's
leadership wi l l be drawn even furth er toward domest ic concerns , and the
inf luence of fore ign indust ry and internat ional organizat ions may cont inue
to fal l , part icu larly i f there aren ' t robus t internat ional agreements on which
to base thei r agreement with China.
In sum, the mixed world view of China 's leaders , the complex pol icy
process and incomplete internat ional economic governance system and the
growing domest ic orientat ion of the en t i re economy mean that reforms wil l
l ikely on the whole move forward but in a hal t ing and incrementa l mann er
with periods of progress interspersed wi th moments of backt racking --not a
new picture.
This complex view of China suggests a mult i -pronged response from
the in ternat ional communi ty and f rom governments . There is much that can
be done at the bi latera l , regional , pluri latera l , mul t i l ateral l evels , and I 'd be
happy to go into these in more deta i l during the d iscussion, but in the
interes t of t ime, l et me s top here.
Thank you.
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PREPARED STATEMENT OF SCOTT KENNEDY, PH.D.
DEPUTY DIRECTOR, FREEMAN CHAIR IN CHINA STUDIES AND DIRECTOR,
PROJECT ON CHINESE BUSINESS AND POLITICAL ECONOMY, CENTER FOR
STRATEGIC AND INTERNATIONAL STUDIES
Hearing on Foreign
Investment Climate in
China: Present
Challenges and Potential
for Reform
January 28, 2015
Prepared Testimony before the U.S.-China Economic and Security Review Commission
by
Scott Kennedy
Deputy Director, Freeman Chair in China Studies Director, Project on Chinese Business and
Political Economy
Center for Strategic & International Studies
Summary
Since coming to power in November 2012, the administration of Xi Jinping and Li
Keqiang has embarked on an intensive effort to reform the country's economy, governance
structures, and foreign policy. These initiatives do not represent a complete break from the
Hu Jintao-Wen Jiabao administration -- Xi and Li have been members of China's political
elite for some time -- but it is clear that they have set comprehensive new goals, many of
which aim to address problems created under the previous leadership. Although the regime
draws on international experiences, suggestions, and norms in developing their plans, the true
initiative for these changes are internally generated. They are not being undertaken in
response to treaty obligations, demands from foreign governments, or as a favor to
multinational businesses. Their goal is to ensure the country's long-term sustainable
economic growth, improve the machinery of governance, solidify the dominant leadership of
the Chinese Communist Party (CCP), and expand China's regional and global influence. As a
result, multinational businesses and foreign governments need to be clear-headed about what
to expect. Foreign companies are already doing well in China, and China's wide- ranging
reforms, if adopted, would improve their operating environment further and generate more
business opportunities. However, even if largely implemented, foreign companies will always
face substantial regulatory, political and social challenges in doing business in China. Hence,
foreign governments' policy responses and multinationals' business strategies need to see the
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current wave of policy changes not as a final battle to turn China into a pure free-market
economy, but as part of a long- term, continuous process of engagement aimed at gradually
strengthening the overall economy and business environment.
The Domestic Roots of Reform
Foreign investors have done very well in China over the last few decades. Every survey
taken by the chambers of commerce of the United States, the European Union, and Japan has
indicated that a large majority of their members are profitable in China. At the same time,
survey after survey reveals substantial challenges to doing business. And in the last few years,
the proportion of companies reporting high profitability has dropped, while the sense of
current unfairness and worries about the future have risen. This has been highlighted by
apparent abuse of the Anti-Monopoly Law and discrimination against Western high tech
firms, particularly in information and communications technologies. Many multinationals
worry that the costs of doing business, in terms of demands made by the Chinese government,
are rising, and that once domestic companies become technologically independent, these
firms, with Chinese government support, will eventually displace them in China and in third-
country markets.
Although the Xi-Li leadership is far from blameless, much of the responsibility for the
current angst deserves to be placed at the foot of the previous leadership. Although the Hu-
Wen administration made great strides in implementing China's commitments under the WTO
and in absolute and relative terms China's private sector grew under their watch, their primary
focus was on making Chinese companies competitive, particularly SOEs situated in key areas
of the economy. A substantial portion of these efforts were carried out as part of China's
"Indigenous Innovation" strategy, which included providing unprecedented levels of financing
for firms and specific projects, ramped up attention to domestically-set technical standards and
locally-owned intellectual property, and encouraging government agencies and others to buy
domestic products. China's industrial policy initiatives under Hu and Wen yielded success in
terms of rapid growth in GDP, greater exports, rising inward FDI, higher corporate profits, and
the emergence of some well-known Chinese companies. But the costs were just as massive:
highly inefficient use of capital, corruption, rising inequality, environmental degradation, and
ongoing economic tensions with trading partners. Winners in industry and the bureaucracy
under this system gained substantial economic and political power, becoming bulwarks against
change.
The Xi-Li administration appears to be fully aware of the problems bequeathed to them
by their predecessors. Even before they assumed office, they signaled that China's original
economic development model had outlived its usefulness and that fundamental changes were
needed to avoid China slipping into the middle-income trap and instead to move on a
trajectory toward long-term sustainable growth. Among those signs was the China 2030
Report. Jointly written by the World Bank and State Council's Development Research Center,
this document provided a blueprint for a new direction. The "Decision on Several Major
Questions about Deepening Reform" issued at the 3rd Plenum of the 18th Party Congress held
in November 2013 restated in definitive, politically appropriate language many of the goals
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and approaches found in the China 2030 Report and other speeches made by Xi Jinping and
Li Keqiang.
In the 15 months since the Decision was released, authoritative documents and
leadership statements, including Li Keqiang's speech to the World Economic Forum in Davos
on January 21, 2015, have reinforced a singular message about the direction of policy. Equally
important has been a long series of policy announcements and regulations, national and local,
which touch upon just about every area of the economy. Among the most important are
liberalization in the financial sector, streamlining business licensing and regulatory approvals,
incremental liberalization of energy and water prices, reducing government intervention for
major investments, expanding the revenue base for local governments while making them
more responsible for debt obligations in their localities, higher penalties for pollution and
greater support for green technologies, and liberalization of the residency permit system.
Reforms involving SOEs have so far included permitting some non-state investment in
previously banned sectors, such as rail; selling minority stakes in central SOEs to private
investors; and changing the performance measurement system and salaries of SOE executives.
China has also taken initial steps to further liberalize foreign trade and investment,
including creation of free trade zones in Shanghai and three other cities, the adoption of FTAs
with Australia and South Korea, and the launching of negotiations for others; permitting
foreign investment in domestic debt and futures markets; progress toward upgrading of the
WTO's Information Technology Agreement; a new, somewhat more generous proposal to join
the WTO's Government Procurement Agreement; and a willingness to carry out intensive
negotiations for a bilateral investment treaty (BIT) with the United States that goes beyond
protection of investor assets to provide national treatment for foreign investors except in
specifically designated sectors. The latest draft of China's "Foreign Investment Law," released
for comment on January 19, 2015, enunciates the basic principle of treating domestic and
foreign companies on equal terms.
Reform and Foreign Business: A Political Economy Balance Sheet
Although there are certain specific elements of China's emerging regulatory system that
one could take issue with, on the whole the changes represent a major positive path forward.
If China were to adopt and fully implement everything already passed and on the drawing
board, we would be witnesses to a watershed in China's economic governance, and foreign
business, would be a huge beneficiary, as would truly competitive Chinese firms and China's
consumers.
But based on past experience and certain core features of China's political economy, it
would be naive to expect a rapid, straight or full adoption of these policies. Instead, as in the
past, the more likely outcome is gradual, incremental and partial movement in many areas
that will eventually yield an improved, though far from ideal operating environment for
foreign business.
There are four factors that point toward a more incrementalist trajectory: the leadership's
overall goals, the nature of China's policy process, an uneven international economic
regulatory system, and the evolving place of foreign business in China's economy. Each area
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encompasses a mix of contradictory forces that balance against each other and make radical
change unlikely.
First, the leadership hold a complex worldview. On the one hand, they have
demonstrated a deep understanding of China's economic and governance challenges and in
principle believe that liberalization and market forces are required to address many current
deficiencies. Yet on the other hand, they also appear to believe that government intervention is
necessary and that in principle there are no places where government should not be permitted
to intervene. Although they have dropped the language of "indigenous innovation," they have
by no means put industrial policy aside, just adjusted some of their approaches. China's leaders
are nationalists who believe China was mistreated by foreign powers during the 19th and
20th centuries, and that China's rejuvenation involves a competitive element in which they
should be champions of Chinese industry, particularly toward companies that are politically
loyal to them.
Second, China's policy process is highly incremental. Xi Jinping has amassed
substantial powers, and created new working groups within the CCP under his leadership that
are making the key decisions on policy. Over the last two decades China's civil service has
become more professional, particularly at the central level. Nevertheless, although policy has
been centralized, the national bureaucracy is still highly influential, and most policies require
their involvement. In this context, bureaucracies that are slated for losing some of their old
powers are grasping for new reins of authority, and they still have the green light to pursue
industrial policy with new tools. This partly explains why the Ministry of Commerce, National
Development and Reform Commission, and State Administration of Industry and Commerce
have so zealously implemented their respective areas of the Anti-Monopoly Law. Beyond
Beijing, provinces and local governments are also central to policy implementation. Although
they understand that they are supposed to be implementing reforms, they are finding it hard to
prioritize amongst the many new strands of policy, and they clearly are waiting to be
compensated with greater sources of income before yielding to new policies that will cut into
their existing revenue streams.
Outside the state, new actors have emerged who participate at various stages of the
policy process, including companies, industry associations, the media, and the courts. They are
important sources of ideas and accountability. Their level of activity has risen appreciably and
in some cases led to greater liberalization consistent with the interests of foreign business, but
in many instances the addition of more actors has resulted in greater gridlock or the
discriminatory applications of rules against foreign business. Moreover, endemic corruption
that blurs the lines between officialdom and industry has made radical policy change even
harder to achieve. China's anticorruption drive, clearly the leadership's number-one priority at
the moment, is aimed at weakening many of these entrenched interests, but without greater
reliance on other more independent accountability mechanisms, such as courts and the media,
it is hard to see how the current effort is sustainable over the long-term.
Third, the international economic system has been an important source of encouraging,
facilitating, and requiring China to liberalize its economy. Despite all the challenges of
implementation, China's entry to the WTO was a watershed, and the WTO has been an
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important venue for negotiating additional liberalization measures and addressing areas of
backsliding. Since it joined in late 2001, there have been 20 WTO cases launched against
China, of which 15 have been completed. The complainants have won a full victory in 13 of
these cases, and in most instances China has responded by modifying the relevant domestic
regulations. Although in some instances, compliance has been slow and not had an immediate
positive benefit on the related sectors, the overall effect has been to constrain greater Chinese
protectionism and to make Chinese more committed to the multilateral trading order.
At the same time, the comprehensive nature of the international trade order is the
exception to the rule. Governance for most areas of the international economy is far from
complete, with unclear norms, ambiguous rules, and insufficient mechanisms to enforce
compliance. Regimes governing capital flows, prudential bank management, equity and debt
markets, foreign exchange, mergers and acquisitions, cyber, climate change and the
environment, and labor are all incomplete. These are precisely the areas where China's
economy requires the most change. The limited nature of international norms and rules means
limited external pressure or clear guideposts and models that provide a path for China to
follow.
The final factor that makes an uneven trajectory for China's economic playing field
likely is the evolving status of foreign businesses in China and the relevance of the global
economy to the country's overall economy. Foreign industry has been critical to China's
economic success since the 1980s, providing technology, products, services, capital, and
management expertise. Chinese companies have become deeply embedded in global
production networks and have developed strong partnerships with companies from the United
States and elsewhere. Exports have been a central source of corporate revenue, consumer
demand, and economic growth, particularly since the mid-2000s. Moreover, foreign-invested
enterprises have been central to China's export success, accounting for over half of all exports
and over 80% of high-tech exports in during the last decade. And in the last few years, Chinese
companies have made overseas IPOs and debt issuance a central part of their financing
strategy.
However, the status of foreign business is in some ways on the wane. China has been
the top destination of foreign direct investment in the developing world for two decades, but
foreign investment is a declining share of the economy. In 2003, foreign-invested firms
accounted for 21.0% of all registered capital in China. By October 2014, that number had
shrunk by half to 11.2%. Foreign firms' share of total fixed investment has fallen from a high
of 11.8% in 1996 to 4.4% in 2003, and to only 0.9% in 2013. Similarly, although foreign
trade has contributed much to economic growth, it is of declining relevance to the overall
economy. At its peak, in 2006, total trade was the equivalent of 65.2% of the total economy.
That figure has fallen consistently, coming in at 41.5% in 2014. China is moving from having
a trade profile like Singapore to one like a mature continental-sized economy where foreign
trade is a much smaller share of economic activity. Exports from foreign-invested firms are
still substantial, 45.9% of total exports in 2014, but this number is also destined to continue
falling. Moreover, if one takes into account that a sizeable portion of "foreign" investment
and trade is with Hong Kong, and hence, to some extent masks domestic firms who simply
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funnel capital through the city, then the true share of foreign investment and trade is even
lower.
By the simple logic of economic gravity, we can expect that foreign companies and the
global economy will maintain a significant yet declining place in the country's political
economy. In a country where domestic state-owned and private companies increasingly
dominate and where most economic activity is internal, the concerns of foreign industry and
the global community may have more difficulty finding their voice, particularly if they are not
supported by international agreements to which China is a party. The primary counter-trend is
growing Chinese reliance on overseas equity and debt markets, but it is unclear what kind of
constraints or incentives these relationships create, particularly when majority ownership and
management remain clearly in Chinese hands.
In sum, the mixed worldview of China's leaders, the complex policy process, an
incomplete international economic governance system, and the growing domestic orientation
of the entire economy mean that reform will likely on the whole move forward, but in a halting
and incremental manner, with periods of progress interspersed with moments of backtracking.
Implications for Policy and Business Strategy
Anyone hoping for a clearer and faster trajectory to a free-market economy will likely
end up feeling like the characters in Samuel Beckett's "Waiting for Godot." Given these
dynamics, there are several steps foreign governments and the international business
community can take to encourage a reformist trajectory.
The first is to hold China accountable to its existing bilateral and multilateral
commitments, through the WTO, regional trade arrangements, and bilateral trade remedies
laws. These institutions have largely been successful and need to continue to be utilized and
supported.
The second is to continue and strengthen the bilateral dialogues and cooperative
arrangements already in place. The Joint Commission on Commerce and Trade (JCCT) and the
Strategic & Economic Dialogue (S&ED) have both been beneficial to identifying and
addressing significant problems in the commercial relationship. The American business
community saw particular progress emerge out of the December 2014 JCCT meeting in
Chicago, and the next S&ED in Washington this spring is another opportunity for further
progress.
Third, we need to develop regional, plurilateral, and multilateral governance
mechanisms in those areas of activity that currently lack such institutions. The thorniest
problems with China often exist where the rules are the least clear. The adoption of the Trans-
Pacific Partnership (TPP), a US-China BIT, renewal of the Information Technology
Agreement, and Chinese accession to the WTO's Government Procurement Agreement all
need to be pursued. In addition, there are aspects of existing major multilateral institutions that
need reforming of their own. The WTO's governance related to trade remedies and the
distribution of voting rights within the IMF are two of the most obvious, but there are likely
others deserving attention. At the same time, we need greater focus on areas of the global
economy where rules are currently insufficient, including in capital flows, banking, and
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competition policy.
Finally, international business needs to continue to engage in its own brand of
diplomacy, stepping up its engagement of the Chinese central and local governments, and
have greater consultation on policy matters with its Chinese business partners. One area ripe
for substantial expansion is greater consultation with Chinese chambers of commerce and
industry associations. At a minimum, these organizations are sources of additional
information about the policy environment, and in some cases, due to shared business interests,
they could become allies with the foreign business sector, all seeking a fairer, more
transparent regulatory environment.
Finally, it is important to keep in mind that regardless of whether the policy engagement
occurs at the bilateral, regional, plurilateral, multilateral, or commercial level, there needs to be
extensive coordination across government agencies and between government, industry, and
other stakeholders.
Chinese industrial and macro economic policies are complex and involve a range of measures
and actors at the local, national, and international levels. An effective response does not
require the US itself to adopt an industrial policy, but it does mean the US needs, to the extent
possible, to coordinate information collection, analysis, and policy actions. None of these
activities, no matter how well coordinated, will yield an unfettered market. Yet a clear-headed,
multi-pronged strategic approach will make continued progress in the direction consistent with
the interests of the foreign business community more likely in the years ahead.
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PANEL III QUESTION AND ANSWER
HEARING CO-CHAIR SLANE: Thank you very much, Dr. Kennedy.
Michael , we ' l l s tar t wi th you.
COMMISSIONER WESSEL: Thank you to al l o f you , and, Josh,
welcome back. I be l ieve you may be our f i rs t graduate who 's come back to
be wi th us . So thank you, and i t shows how great we 've been in t raining, et
cetera . So I enjoyed your tes t imony. It was spot on .
I 'm t rying to look a t where we are , whether we 're at some kind of
crossroads here. Ms. Ba rale , you talked about the new investment laws and
the uncertainty. We have a number of companies and indust r ies that have
come before us over the las t several yea rs . S ince the beginning, there was --
when China became a member of the WTO, there was a grea t deal of
enthusiasm for the prospects of the Chinese market , how engagement would
resul t in dramat ic changes .
Yes, there have been changes, but I think the returns f rom the China
market have not been as robust as some would l ike , and with what 's
happening in cyber, IP , a number of other things, there 's a much greater
uncertain ty, and what we always hear i s i f you ' re going to go to China, you
need to go there wi th your eyes wide open .
So against that thought , why do we want to s t imulate more investment
in China f rom the posi t ion of the average American? As I understand i t , 56
percent of China 's export s come f rom foreign invested enterpri ses . The
potent ia l returns in the market are not as great as they used to be or not as
great as hoped for . The potent i al for theft of your IP and real iz ing al l o f
your object ives is d iminished .
The adminis t ra t ion i s rushing to complete a Bi latera l Investment
Treaty, now in thei r 18th, I bel ieve i t i s , round of negot iat ions , which
would cement in place our rules . We're v ery rule oriented . But we have
t remendous uncer ta inty about what China i s actual ly going to do. Shouldn ' t
we be taking a pause? Isn ' t i t a l i t t l e premature at th is poin t for us to
engage in a whole new embracing of a new round of inves tment by U.S .
companies? Shouldn 't we be s i t t ing back and real ly taking s tock of what 's
happening? And for each of the witnesses , p lease .
MS. BARALE: I guess , f i rs t o f al l , to s tar t wi th, whether we are t rying
to s t imula te more investment or some other purpose is discus sed here, from
where I s i t , the t ype of work I 've done in the past and where I 'm teaching
now, the s tar t ing point i s that we al ready have a lot of U.S. investment in
China.
Therefore, we care very much whether the laws are wri t ten in a way --
COMMISSIONER WESSEL: Agreed . Agreed .
MS. BARALE: -- that is going to be fai r deal ing; r ight? So are we at a
crossroads? I think we are very much a t a cross roads . I think we need to
devote some serious s tudy to what this new draft Foreign Investment Law
is , to see whether along with the int roduct ion of some internat ional
s tandard concepts , l ike nat ional t reatment , they are al so int roducing various
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systems that are going to keep rest r ict ions on foreign investment in place
for the years to come.
And I have to say t hat , one of the concerns I have about the
negot iat ion of a Bi latera l Investment Treaty is that the use of a negat ive
l is t , even with sunset provis ions in i t , i s going to lock us into a very
rest r icted or anci l lary role in the economy, unl ike what we 've see n with
WTO and Schedule 9, which has ex tensive l is ts of these sor ts of opening up
provis ions, but which also funct ion as l imita t ions on fore ign investment
some point once they were implemented .
WTO negot iat ions are more of an ongoing nature. When we ente r into
a Bi lateral Inves tment Treaty, i t pret ty much s tays put , and so wi th that in
mind, I am concerned that , on the one hand, things are changing, they could
be opening i t up for perhaps a more even playing f ield, but , on the other
hand, we can see when we look at the s t ructure of this l aw, and maybe the
s t ructure of some of our other negot iat ions us ing a negat ive l is t , that we
would be s tuck in a very l imited role in the economy.
COMMISSIONER WESSEL: Understand. Josh. Thank you.
DR. EISENMAN: Well , i t ' s a great p leasure to see you again ,
Commissioner Wessel . So, gosh , how to answer this . Yes is the answer.
COMMISSIONER WESSEL: Al l r ight .
DR. EISENMAN: I bel ieve you are correct , s i r . But how to go f rom
there? As I said in my tes t imony, I 'm concerned about U.S. ent i t i es
invest ing in Chinese capi ta l markets too ful ly and too quickly wi thout ful ly
understanding i f i t ' s even possib le to understand f rom an outs ider 's
perspect ive what they' re get t ing in to. Then you have r isks of contagion,
which magni fy f rom there depending on the level of investment .
I 'm also, as my co -panel i s ts , somewhat concerned about a negat ive l i s t
approach. It seems that on the American s ide , we 're qui te pleased to know
that we 're now using a negat ive l is t approach . That 's a good approach
compared to where we were, but i t does al low for certain sectors to be taken
off the table, and we 're s t i l l congratulat ing ourselves while these sectors , in
which we may have comparat ive advantage, such as sof tware, are being
taken off the table.
So, yeah, I would agree with your assessment , and I think that i t would
be good to have an assessment , but I th ink not only an assessment on the
economic s ide . I th ink that , as I said in my test imony, i t would be r ight to
have a more ful l - throated reassessment of our interact ions to f igure out
what is working on the economic, pol i t i cal and mil i tary s ides so we 're us ing
taxpayer money ef fect ively to achieve object ives , not jus t having dialogue
for dialogue 's sake, which we 're al l very fami l iar wi th .
Thank you.
COMMISSIONER WESSEL: Agree. Thank you.
Professor.
DR. KENNEDY: Thanks . You know, your ques t ion i s wel l t aken . The
surveys that the var ious Chambers of Commerce, U.S. -China Business
Counci l , and others conduct of thei r members who are doing business in
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China cons is ten t ly come back showing that a very high proport ion of them
make a profi t , and so despi te al l those problems they' re s t i l l making money.
It ' s probably to thei r disadvantage to publ icly s tate that they' re making lo ts
of profi t in China because as soon as you say that , you got folks coming
into your wal let , Qualcomm being a good example with what they d id las t
year , report ing how much they' re making in China.
But i t does seem that despi te the chal lenges, China is the place to m ake
money, and they've done relat ively wel l . Whether i t ' s benef i ted the rest of
the American economy, the compet ing sectors that we have, labor, et cetera ,
tha t 's an even larger ques t ion.
But I think on the whole, the U.S. has benefi ted even though we
haven ' t achieved some of the dreams that some people expected . I was
t rying to suggest in my original remarks that we need to not do that again ,
tha t we need to be more real i s t ic about what can be achieved and what we
ought to be aiming for .
Are the BIT negot ia t ions tak ing p lace prematurely? I think that ' s a
great ques t ion, and i t 's very awkward because we 're deal ing with al l o f
these defensive problems at the moment . With al l o f these problems that are
popping up, you would think that we ought to be put t in g out f i res , and how
can you be talk ing about nat ional t rea tment where everyone is t rea ted
exact ly the same, where i t seems l ike there would be no room for indust r ial
pol icy, ye t you see indust r ial pol icy af ter a thing, one af ter the other .
My sense is that you could say China is at a crossroads everyday, but I
think of i t more as sort of this long t ransi t ion because i t ' s such a huge
count ry and i t ' s changing. China today looks very d if ferent f rom the way i t
used to be, and in ten years i t wi l l look even di f ferent .
But what is China 's interes ts in negot iat ing? To some extent I th ink
they've watched us negot iat ing TPP and some of these other potent ial
agreements , and they' re worr ied they' re going to miss the boat , and so to
some extent , TPP is al ready be ginning to ful f i l some of i ts ut i l i t y in forcing
conversat ions on topics that they original ly d idn 't want to d iscuss .
But wil l we get to a BIT this year? I 'm not super -opt imist ic about that ,
and I think there are probably other areas where we could focus on and also
just observe, as the other panel is t s suggest . If for some reason we get
incredibly lucky, as Professor Eisenman said , i t won ' t be because we
demanded i t ; i t wi l l be because they decided i t was in thei r best interest s .
COMMISSIONER WESSEL: Thank you.
HEARING CO-CHAIR SLANE: Dennis .
VICE CHAIRMAN SHEA: Well , thank you al l for being here , and,
Josh, I never knew you, but I 'm glad you 're back and I l ike a lot of what
you have to say.
This quest ion is , I guess maybe for Professor Barale, abo ut the draft
Foreign Investment Law that you described. Josh, I 'm proud to say we
cont inue to have a great s taf f here at the Commission , and they wrote us a
memo, and i t said the draft Foreign Investment Law appears to be the f i rs t
t ime China would defini t ively c lassi fy VIE, the variable in terest ent i t y,
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st ructured f i rms as foreign f i rms. And that ra ises the ques t ion of Alibaba,
which is the largest IPO, I think, in U.S . hi s tory, and i t ' s s t ructured as a
VIE ent i t y.
Do you have any ins ights? This suggest s that maybe the VIE s t ructure
of Al ibaba would be i l l egal under this draft Foreign Investment Law. Do
you have anything to shed some l ight on?
MS. BARALE: Wel l , we ' l l t ry. Let ' s see.
VICE CHAIRMAN SHEA: Okay.
MS. BARALE: It 's a very importan t ques t ion , and i t cer ta inly is one
that everyone i s t alking about . The draft law brings about some real ly
fundamental changes for the way China regula tes foreign investment . Unt i l
now, China has regulated foreign investment according to the form of
investment -- i f i t was an equi ty joint venture, or a cooperat ive jo int venture,
or a whol ly-owned foreign, then you had to go get your foreign inves tment
approval .
And then foreign investors s tar ted doing th ings l ike acqui r ing a
Chinese company. In such cases , then they are not forming an equi ty
joint— they are not forming a new company, and i t doesn 't fal l neat ly into
the ex is t ing law needing MOFCOM approval . So MOFCOM had to wri te
merger and acquis i t ion rules .
As business and the economy grows, and Chinese invest ors , foreign
partners , al l grow in thei r experience and sophis t ica t ion, there are new
forms of doing business , or things get s t ructured in di fferent ways as
needed, and they don 't f i t neat ly into law.
So what 's happening in the new draft l aw i s they' re no t going to t ry to
regula te according to the form of investment , bu t they are going to regula te
foreign inves tment by the defini t ion of who is a foreign investor , and what
is a foreign investment . And so for the f i rs t t ime, they wil l be looking to
the ul t imate benef ic ial owner of the investment . It won’t mat ter that the
investment was made through a Dutch NV or a Luxembourg company or
whatever t reaty juri sdict ion you chose to make your investment through.
Government regulators could look through ul t imate l y to see who is the rea l
investor- - i s tha t an American investor behind that or another nat ional i t y?
So this is what brings into quest ion whether some of these rules are
going to be appl ied to evaluate the VIE s t ructures --
VICE CHAIRMAN SHEA: Well --
MS. BARALE: We have, al so, as you probably are very wel l aware,
this phenomenon for China cal led "U -turn investment ," where Chinese
money goes out , and comes back in in the form of a Delaware company or
something.
VICE CHAIRMAN SHEA: So , excuse me, so with respect to Alibaba,
a foreign f i rm cannot be a control l ing --
MS. BARALE: Cannot get the l icense that ' s - -
VICE CHAIRMAN SHEA: Right . In the In ternet sec tor . Now Alibaba
got around that by creat ing this workaround, this VIE s t ructure, and , as I
recal l , set t ing up contractual relat ionships with a Chinese domest ic ent i t y
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cont rol led by Jack Ma and some others , but people were invest ing in a
Cayman Is lands holding company that had cont ractual re la t ionships with the
t rue owners of the l icenses in China .
Now, wel l , i t 's unclear . So I 'm just t rying to get a sense of how this
draft l aw appears to be the f i rs t t ime China would def ini t ive ly classi fy VIE
s t ructured f i rms as foreign f i rms. So Al ibaba i s operat ing in a space where
foreign f i rms cannot operate und er Chinese law.
MS. BARALE: Uh -huh.
VICE CHAIRMAN SHEA: So shed some l ight , please .
MS. BARALE: It 's interes t ing that in the draf t l aw, the provis ions that
seemed so relevant for this provis ion are actual ly put on as an a t tached
explanat ion so they looked l ike they' re being evaluated. But let me just say
that the way the draft law would go about evaluat ing whether there is a
foreign inves tor or a Chinese investor behind the s t ructure , according to the
procedures that would be proposed in the laws , a p rocess whereby investors
in ex is t ing s t ructures that might be i r regular under the new law would have
a chance to come forward and apply for government approval and to
determine whether the ul t imate - -
VICE CHAIRMAN SHEA: It ' s a ro l l of the dice there; isn ' t i t?
MS. BARALE: And that we would assume that the fu l l s t ructure
involved in these investments in China wil l be disclosed , and the actual
beneficial owners and thei r nat ional i t y wil l be t ruthfu l ly di sclosed . There is
also a proviso that i t i s possible for the State Counci l to make an
except ional decis ion that would al low some of these to perhaps go forward .
VICE CHAIRMAN SHEA: Yeah.
MS. BARALE: But I think what you 're reading in the memo is the
takeaway that everybody has got that VIEs are dead , an d that , in most
cases , maybe not in an ex t raordinary case, bu t in most cases , we would
assume that when the benef ic ia l owners and the t rue nat ional i t i es are
disclosed, the appl icat ion wil l be denied. The appl ica t ion for a foreign
investment approval would not go forward , would be denied in most cases ,
but the law does provide for a determinat ion of an except ion .
VICE CHAIRMAN SHEA: Okay. Yes , Professor Kennedy.
DR. KENNEDY: I 'm not an expert in the detai l s of the law, but s ince
your ques t ion was prompted by Alibaba, I think us ing a l i t t l e
"Zhongnanhai -ology" here to analyze thei r own pol i t i ca l s i tuat ion , we know
they've been given approval to invest in a whole lot of areas where you
wouldn 't expect . These publ ic s tatements by Li Keqiang and others to
endorse thei r inves tment in elect ronic payment services and the f inancial
sector is the biggest chal lenge to companies l ike UnionPay and o thers that
have dominated in this sec tor that we 've seen. At the same t ime, just l as t
week, we saw Al ibaba 's Chie f Jack Ma in Davos interviewing Li Keqiang.
They are on camera with each other al l the t ime. I don 't th ink Alibaba
is going to be facing a whole lot of t roubles . They've done the government
relat ions job probably bet ter than any of us could have done. And they s t i l l
have a lot to do , but at the moment , they' re looking pret ty sol id . I think
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they wil l al low thi s t ype of legal s t ructure to cont inue, or i f they don 't ,
they' l l f ind a way to change i t so that Al ibaba and others can move to other
t ypes of s t ructures .
VICE CHAIRMAN SHEA: Can I just ask a quick fac tual quest ion?
Has this draf t l aw been in the process for qui te some t ime? Has i t been
publ ic ly noted that i t 's being drafted?
MS. BARALE: We knew, I knew, and I imagine o thers know even
bet ter , t ha t the Minis t ry of Commerce had a special t eam working on how
they were going to revamp the Foreign Investment Law. You probably know
that in the decis ion of the Third Plenum of the Par ty Cent ra l Commit tee, the
plenary session in November of 2013 talked a bout some of these reforms
that were proposed and s la ted for going forward, and one of them was the
reform of the investment sys tem.
There was the use of this t erm "nat ional t reatment" and that sort of
thing. But we d idn ' t see anything for a long t ime, a nd so th is is only come
out s ince the 19th of January. Today i s the 28th.
VICE CHAIRMAN SHEA: It would be interes t ing to look back at some
of those prospectuses . I know, Josh, you sa id you have an interest in the
capi tal - -you worked in the capi tal mark ets as part of our mandate is , you
know, these prospectuses wi th these IPOs, VIE, Chinese VIE ent i t ies ,
whether -- that ' s why I asked the quest ion, whether th is draf t l aw was known,
whether --
MS. BARALE: January 19.
VICE CHAIRMAN SHEA: -- this t ype of informat ion was disclosed
because i t ' s obvious ly material about i f the whole s t ructure is potent ia l l y
i l legal , whether the fac t tha t the draft l aw was in process , whether that r isk
was disclosed? And I don 't know in these prospectuses .
MS. BARALE: As I understand , there i s a s ta tement in the Alibaba
prospectus about the r isk involved with --
VICE CHAIRMAN SHEA: Yeah. I jus t don ' t know. There was a lo t
about the r i sk , but about this draft l aw. I don 't know i f there was any
ment ion of a draft Investment Law being worked on.
MS. BARALE: No. In fac t - -
VICE CHAIRMAN SHEA: Okay.
MS. BARALE: --we real ly didn ' t know whether they would be revis ing
the ex is t ing laws because they are so wel l understood across China. You
know, one of the quest ions you have t o raise i s why f ix something that 's not
tha t broken? You have a l l of these government of f ices across China where
they unders tand equi ty join t ventures qui te wel l , thank you, and they know
how to approve them. You just have to look at foreign investment s ta t i s t i cs
to know i t has worked pret ty wel l .
So now they' re going to scrap al l o f tha t and go with a new system. It
i s real ly a big decis ion but i t wasn ' t clear tha t what was going on .
VICE CHAIRMAN SHEA: Okay. Thank you.
HEARING CO-CHAIR SLANE: J im.
COMMISSIONER TALENT: Yeah, three quest ions. Dr . Eisenman,
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you ment ioned that given the a t t i tude of the Chinese government , you
thought as American or as foreign investments grow, you thought that
pension funds, e t ce tera, should be careful about what th ey invest in . I ' l l
jus t give you a l l th ree quest ions, and I 'd l ike you to e laborate on that
because maybe that ' s something where we should make a recommendat ion to
the Congress .
The second quest ion , I 'm just curious about something, I know that the
Chinese leadership i s concerned about the ef fect of the huge increase in
corporate debt in China that ' s occurred as a resul t o f thei r s t imulus pol icy
and o thers over the las t few years .
And I 'm wondering i f there is any connect ion between that concern and
this recent wave of sor t of di scriminatory act ions against American
companies invest ing? Whether there 's a sens i t iv i ty about the SOEs now
because they' re car rying this ex t ra debt tha t they d idn 't have before? I
don ' t know i f you have a comment on that .
And, then , f inal ly, general ly, do you see any c i rcumstances where the
regime would conclude that comprehensive economic reform, you know,
including predic table and nondiscriminatory ru les for investment , might
outweigh the r isks to Par ty cont ro l , might actual l y be in their interests so
that they would do i t?
DR. EISENMAN: Well , thank you, Commissioner, for those cogent
quest ions.
In terms of the issue of pension funds, what I 've t r ied to do here is
rea l ly get out in front of an i ssue which has not material iz ed yet , but is an
issue which could material ize i f China i s successful in drawing large
amounts of fore ign investment into i t s capi ta l markets .
And so i t ' s one th ing to s i t before a Commission such as yours af ter i t ' s
been done and say look what has happe ned. So in a way I 'm t rying to put
my f inger on something in the hopes that we can get an eye on th is as early
as possible because, as we 've seen t ime and t ime again, the more
interwoven the economies get , the more contagion becomes possible .
The U.S . and Chinese economies are highly inter rel ian t , bu t i f U.S.
pension funds were to be invest ing in s tate -owned enterprises that are black
boxes , I would be deeply concerned about i t . But again I want to s t ress tha t
I don ' t have any proof that that ' s happening , but I want to make sure that i f
i t does happen, that this body is aware of i t .
COMMISSIONER TALENT: I don ' t mean to be cri t i cal . I appreciated
i t , and I know as a former member of Congress , somebody has a concern
about my const i tuents ' pens ion funds , you know, even prospect ive ones, you
want to know i t . So that ' s why.
DR. EISENMAN: No, thank you very much, Commiss ioner.
In terms of the increases in foreign debt and that perhaps being a
reason to put pressure - - I 'm sorry-- in corporate debt , and perha ps that being
a reason to put pressure on foreign f i rms, I bel ieve that thi s has been, and i t
was wri t ten about actual ly by Wang J is i o f Bei j ing Univers i t y as early as
2011, that thi s has k ind of always been the plan , to dial back on foreign
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direct investment , especia l ly into indus tr ies that they might cons ider d ir ty
indust r ies , pol lut ing indust r ies , as soon as they fe l t that they'd acqui red the
know-how and the capi ta l investment that they were after .
And then reaching a point that they fe l t tha t they cou ld do i t on thei r
own, moving on and moving up the value -added chain , and I think that thi s
is something which is not I would say d irect ly re la ted to thi s corporate debt
al though I would say having thought about i t now that you 've asked the
quest ion , i t certainly couldn 't help ; r ight? It certainly would be a reason
why you 'd want less compet i t ion in the market in order to have a higher
price, but I don 't know that that ' s necessari l y the number one driv ing factor ,
but i t ' s cer ta inly not a countervai l ing fac tor . Does that not make sense?
And the f inal quest ion, I - -
COMMISSIONER TALENT: Any c ircumstances where -- I agree with
you. They make decis ions based on what they th ink is in the interest of the
regime.
DR. EISENMAN: Uh-huh.
COMMISSIONER TALENT: So could you see any c ircumstances
where they might on balance conclude i t would be in thei r interest s to have
a se t of rules or a regime for foreign investment that was predictable and
nondiscriminatory? I mean what i f I was in the Standing Commit tee of th e
Pol i tburo, and I wanted to make that argument , i s there any argument I
could make that you think might be persuasive in the fu ture?
DR. EISENMAN: Well , I think they' l l take i t on a sec tor -by-sector
basis , and in those sectors where they feel that they can gain from foreign
involvement , and there is no pol i t ical th reat to them at al l , then that 's f ine.
But for those sectors , including the ones that I 've ment ioned and o thers that
they fee l are pol i t ical ly sensi t ive and even pose a modicum of threat ,
there 's just no reason to open themselves up.
So to answer your quest ion very d irect ly, no , I don ' t think that there i s .
In some sectors , i f you were to say, you know, we can save a lot of money
by having Microsof t on a l l of our government computers rather than the
domest ic sys tem, I don ' t think that ' s go ing to be convincing at this date .
COMMISSIONER TALENT: And i f the other panel i s ts or witnesses
want to comment , I 'd love to hear i t .
DR. KENNEDY: Excel lent quest ions for which I don ' t think anyone
has perfect answers except for Professor Eisenman. I 'd say, you know, i f
you look a t China establ i shed a sys tem cal led "qual i f ied foreign
inst i tut ional investors" several years ago and gradual ly increased the quotas
to al low fore ign investors to inves t in Chi nese capi tal markets di rect ly and
in the s tock market , the bond market .
We know what the quotas are. We don ' t know how much they've used ,
but essent ia l l y what we seem to know is that they haven 't used thei r quotas
because of the r isks that you talked abou t and that others have ment ioned ,
tha t i t ' s a very r isky thing because you just don 't know what 's under the
hood even i f you 've read the paperwork , even i f i t ' s audi ted paperwork ,
even i f they have a credi t rat ing. If our credi t rat ing companies have
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t rouble , you ought to see what a Chinese credi t ra t ing company i s l ike, and
I spend a lot of t ime looking at what they do.
That 's the f i rs t thing. So I th ink they' r e al ready very hesi tant so even
i f the quotas cont inue to expand or they' re al lowed to go into other areas
l ike China 's fu ture markets or der ivat ives markets , I would expect
cont inued hesi tancy both for the individual company problems and the
s t ructural i ssues .
The second point is tha t this makes even more importan t Chinese local
government f i scal reform because Chinese companies according to the
budget l aw aren ' t al lowed to d irect ly i ssue their own bonds or the ir own
debt . They got around that by creat ing these local government investment
vehicles which could do so, and they'd be cal led corporate bonds.
That debt has expanded dramatical ly. I t 's not di rect ly on the books of
the governments . Sometimes , in principle , they' re supposed to essent ial l y
be sovereignized wi th the government s tepping in i f there 's a problem, but
we 're seeing repor ts in s ome places they do s tep in , in some cases , they
don ' t , and so I expect to see some defaul ts , which I don ' t th ink is
necessari l y a bad th ing because that te l l s me what the r i sk i s .
The reforms that they' re considering would be to al low local
governments to issue municipal bonds and put thei r debt on the books , make
i t much more t ransparent . And then make the provinces , no t the central
government , the ul t imate guarantor to s tand in and be responsib le , and so
instead of having one guarantor have 31 .
I think that ' s potent ial l y a much bet ter system. China 's f inancial
system at i t s heart , the problem is moral hazard. You loan out money. You
expect people to return i t . They don ' t . Then what do you do? Then
someone else s teps in . So thi s i s one way to pote nt ia l l y address that is sue,
but we ' l l jus t have to see. It ' s , you know, everything in China is about
implementat ion.
The las t thing i s , you know, what wil l the Chinese, what would the
Party a l low, you know? I t end to see just about everything in China a s
instead of yes /no as par t of a s l iding scale, as some par t of shades of gray.
And just about every Chinese pol icy that they implement or adopt is very
specif ic , and they go s tep by s tep, cut things 75 di f ferent ways , and so I can
see lot s of ways in whi ch they would gradual ly yie ld on pol icies and rules
tha t would be benef icial to business including foreign business .
I don ' t expect any monster jumps in one direct ion or not because i t ' s
just no t part of thei r character .
MS. BARALE: If I may make a comm ent? I 'm int r igued by your las t
quest ion . I think i t ' s one that real ly makes us want to th ink about why
would they do this , so I think your ques t ion was something l ike i f you were
in the Pol i tburo, how would you make the argument?
COMMISSIONER TALENT: Persuade them on their t e rms because I
agree very much with what Josh sa id. Al l th is ta lking and expect ing that
they' re just unenl ightened and that they' l l l earn and grow as they' re exposed
to us , i t real ly does them a t remendous disservice. I mean they know what
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they want to achieve.
MS. BARALE: That 's r ight .
COMMISSIONER TALENT: So you have to persuade them on thei r
te rms , and I just wondered i f you saw any ci rcumstance where they might
produce a pol icy that was consis tent ly more, you know, in l in e wi th what
we 're urging them to do?
MS. BARALE: I can imagine conversat ions that go something along
the l ines of we 're no longer a s tate -planned economy, we 've outgrown an
old Sovie t social is t s tyle legal sys tem. We have a much s t ronger legal
system. And we are ready to take our place on the world s tage in
internat ional organizat ions , and we 've a lso learned enough about fore ign
laws. We can use ant i t rust l aw. We can use a nat ional securi ty regime.
We can work with nat ional t reatment and add our own defin i t ions and
preserve China 's interests but using the concepts that we f ind used in the
legal sys tems of other major count r ies .
And I think we could imagine that conversat ion and see that some of
what 's coming out in front of us is exact ly that . You k now, i t ' s an ant i t rust
law, wi th some special , wi th their own defini t ions to i t . And here for
nat ional t rea tment , i t 's going to be nat ional t rea tment for foreign investors
but wi th some major qual i f icat ions.
And in this new draft foreign investment law, we also have a chapter
on nat ional securi ty rev iew, and we 've had a couple of regula t ions on
nat ional securi ty review for acquis i t ions by foreign inves tors , but they are
defini tely going to be ramping that up in th is new Foreign Investment Law
as wel l .
HEARING CO-CHAIR SLANE: Carolyn.
COMMISSIONER BARTHOLOMEW: Thank you and thank you to al l
of our wi tnesses .
Professor Barale , and I hope we 're not a l l s laughtering the
pronunciat ion of your name, I have a quest ion for you and then a ques t ion
for al l three of you . I guess the quest ion for you is every t ime you 're now
ment ioning the draf t Foreign Investment Law, and i t ' s a week old, so you 're
r ight , i t ' s way too new for us to be drawing any sorts of conclusions, but to
me one of the issues , of course, is w hat sectors wil l be exempt and what are
the major qual i f icat ions that are going to be happening in order to be able
to measure i t?
But I wonder i f you could say anything about what benchmarks you
think we should be al l thinking about as th ings move forwar d in terms of
gauging both the ser iousness of inten t regard ing economic reform and a lso
the success of implementa t ion? What are, say, the three or four key things
that you th ink that we should be gauging when we 're looking at that?
And then the quest ion for a l l of you is I 'd just l ike your thinking about
so why now? I mean is the release of this something to do because they
think that i t wi l l help address the economic s lowdown that ' s taking place
or , you know, why would you think that thi s i s happening n ow?
MS. BARALE: I th ink we 're not going to be able to evaluate the
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proposed new way of doing foreign investment regulat ion unt i l we see th is
specia l adminis t ra t ive measures on rest r icted and prohibi ted investments .
Some people have said , wel l , jus t look at the Foreign Inves tment Guidance
Catalogue now. We have encouraged, prohibi ted, and , in fact , the NDRC
came up with a new draft in November. Take a look at that .
But I 'm not sure that that is go ing to tel l us . I 'm not sure i t ' s going to
be the same, and we don 't know what kind of res t r ict ions are going to be in
i t . The th ings that we 're concerned about are not only the areas where we
can ' t invest or where we have l imited opt ions, but al so those areas and
types of inves tments where we must have a C hinese par tner or we must have
a Chinese partner who has a majori t y say in the venture.
And whether there would be other res t r ict ions or , condi t ions put on the
investment .
One of the th ings that comes along with thi s new law is the possibi l i t y
tha t new investments won ' t necessar i l y be for a l imited term of years . With
nat ional t rea tment , i f you ' re in the nat ional t rea tment scheme, i t appears
tha t the foreign investor would be determining i ts investment under the
Company Law and how long that investment should las t .
But i f you are found to be in the rest r icted sector , then there are
condi t ions that can be a t tached to the approval of your investment , and we
don ' t know what those condi t ions might be . We know that there are going
to be procedures for the formulat ion of these rest r icted l is ts and that they
must be formulated in a way that wi l l be consis tent with thei r obl igat ions
under internat ional t reat ies , but at present i t ' s al l b lank .
COMMISSIONER BARTHOLOMEW: So we real ly, I mean we 're at a
s tage where we don ' t know i f i t 's real or i f i t ' s sound and fury s igni fying
noth ing. I mean unt i l we see more informat ion .
MS. BARALE: I guess i t looks real . I guess the way I would look at i t
i s we don ' t know whether the opening up is th is big or is th is b ig. U nt i l we
see the l is t and we see just how much is put on the l i s t and what kind of
condi t ions would be at tached that would rest r ict these types of foreign
investment , I don ' t know.
When we look a t the Foreign Inves tment Guidance Catalogue now, and
we see that i t 's an investment in a certa in t ype of energy or a school or
something, we know whether we have to do a joint venture and whether i t
needs to be a cooperat ive joint venture , and whether the foreign or the
Chinese investor needs to be the majori t y s tak eholder , and so that very
basic informat ion for those industr ies that are l is ted , those types of
investments in the Foreign Investment Guidance Catalogue i s s tated.
So there 's a certain amount of t ransparency on that . Well , we ' l l t alk
about t ransparency later .
COMMISSIONER BARTHOLOMEW: So then the o ther quest ion i s just
thinking about so why now? Why is thi s happening now?
MS. BARALE: Wel l , I have to say that I put the same quest ion to
Chinese academics when we could talk about th is , and i t seems to be t i ed to
the need to spur the economy forward and that greater compet i t ion f rom
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foreign inves tors spurs more development in the Chinese economy.
But I defer to my panel members to see from a di f ferent point of view
whether we can get at a bet ter answ er.
DR. EISENMAN: It ' s a great pleasure to see you again, Commissioner
Bartholomew.
So why now? And again this is a very dif f icu l t , to put yourselves in
the shoes of another in a very complica ted set of ci rcumstances so , you
know, with a grain of sal t , to be sure, p lease take these comments .
I would say one is you 've got a new leadership , and they want to push
forward change in the economy. There were concerns about the way that the
Chinese economy was funct ioning general ly, speaking in macro terms , and
so there 's a desi re now to change that , to make i t cleaner to avoid, as
Professor Kennedy talked about , the middle income t rap, to be proact ive in
addressing these problems, and to have the new leadership seem to be
proact ive in a pol i t i cal sense, both for the int ra -Party audience and to some
degree the Chinese people genera l ly speaking.
We've also seen fal l ing foreign investment in to China , and so there
could be a desi re to s t imula te increased foreign inves tment . When that
number is fal l ing in sock fa ctories and things l ike this , you want to t ry to
lure i t in in di f ferent ways , and you use dif ferent new pol icies to a t t ract
foreign inves tment into those sectors you 'd l ike i t to be in .
As one person in the Party had ment ioned to me, you know, you can ' t
come to China and bui ld a toy factory in Shenzhen anymore; r ight? We
don ' t want that kind of investment . And so i f you don ' t want tha t kind of
investment , now you have to change the ru les so you can lure and draw in
the kind of inves tment you want .
And, then , thi rdly, I would say the growth of outward FDI as a fac tor
is something we hadn 't seen much of in the pas t , and thi s goes wi th the
general hi s torical t rend. The U.S . , as everyone probably knows, invested in
Japan. We invested in Korea, and then Ko rea and Japan--wel l , Japan
invested in Korea and i t invested in Taiwan, and now everybody invested in
China, and so now China seeing margins fal l wi th r i s ing labor cos ts , et
cetera , i s looking outward to see where i t can f ind h igh returns .
And most of tha t capi tal appears to be f lowing in to the United States i f
I 'm not mistaken, but , o f course, there is a great bi t going into Africa and
other p laces as wel l . So in order to have an investment cl imate, an outward
FDI c l imate which i s sui table to that pol icy object ive , you 've got to put in
place a legal s t ructure which faci l i t ates i t and makes i t poss ible to do. So
that 's why I would say now certainly a pol i t i cal component , but a good
economic one as wel l .
Thank you.
COMMISSIONER BARTHOLOMEW: Dr. Kenned y, anything to add?
DR. KENNEDY: Sure. You know the p lanning of laws, anything that
get s put out l ike thi s by the government for considerat ion, there i s a long
process by which i t ' s placed on a l is t and part of the ir agenda, This is the
f i rs t d raft tha t 's been issued publ icly for comment , and so we know i t 's
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never gone before the Nat ional People ' s Congress or the Standing
Commit tee of the Nat ional People 's Congress .
And typical ly now any law that ' s passed nat ional ly goes through three
readings , and so t he 30 days wil l end in mid -February. I th ink i t ' s h ighly
unl ikely that i t wi l l go through a ful l reading of this meet ing of the NPC
beginning of March. So you 're looking mid -Apri l for the f i rs t , sometime in
the summer for the second.
So I think we 're o ver a year away f rom actual ly seeing th is thing
passed and coming into ef fec t . So i t wi l l p robably take ef fect in 2017
would be my guess i f they keep along the path, but , o f course, we 've got
other Chinese laws that get s tuck many t imes. So th is i s ear ly , and so that
we get to see i t now. There wil l be plenty of chances to debate thi s within .
I 'm sure we ' l l see a lot of conversat ion.
Why are they doing this? Well , beyond the poss ibi l i t y that maybe
they've seen the l ight and they need to make things be t ter for foreign
companies because of a l l the problems. You know, I don ' t know if thi s i s
being cynical or not , but when China was t rying to decide 20 some years
ago whether to a l low private companies to expand in China, you know, the
original ca tegories they had in s tat is t ica l yearbooks and that they would
report made the possibi l i t y that i t would l ike this , would be an economy
that wouldn 't be run by s tate -owned enterprises , that i t would be private ,
tha t i t would be privat ized, not with pr ivat iza t ion of indiv idual companies
but by the expansion of more private companies .
And so they changed the defini t ion of these companies and the
categorizat ion to make i t so that conservat ives couldn ' t c r i t icize them for
going capi tal is t . And we may be seeing the sam e thing here. They may be
changing the categorizat ion and el iminat ing the category of foreign
companies so that i f foreign companies expand, they can ' t come under
at tack by someone point ing at the data and saying, hey, look , there 's a lot
of foreign companies here.
So i t could be that . It could be the opposi te . It could be foreign
investment is facing more d if f icu l t ies , but we can ' t f ind the data to tel l
them that , hey, the investment i s going down or we 're facing more
problems. So i t could be e i ther w ay.
Another possibi l i t y is this may be the pol icy s ide of what may
eventual ly come in terms of various bureaucra t ic reforms. So current ly
there is a big d is t inct ion in the respons ibi l i t ies of the Minis t ry of
Commerce and the Nat ional Development Reform C ommiss ion. This may be
part of an eventual readjustment of what those two inst i tut ions do or the
merging or el iminat ion of one of them, and so we 're seeing the legal pol icy
s ide of what 's going on f i rs t , and then maybe eventual ly there wil l be
inst i tut ional changes that would occur in early 2018.
COMMISSIONER BARTHOLOMEW: Thank you.
HEARING CO-CHAIR SLANE: Katherine .
COMMISSIONER TOBIN: Thank you a l l , professors .
You 've given us a window into the changes in China, and earl ier
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Commissioner Wessel asked about the Bi lateral Investment Treaty. I bel ieve
i t was you, Dr . Kennedy, who said you didn ' t foresee i t happening any t ime
soon, and par t of our quest ion was i s thi s the t ime for i t?
But I 'd l ike to hear from each of you, i f we were to conclude the BIT
this year , next year , what ef fect , i f any, do you see i t having on the
American economy? You three are as exper t as they come on this . If we
were to move forward , and i t may be just negat ive, but what posi t ives or
negat ives can you see in terms of e f fect of a Bi lateral Inves tment Treaty?
MS. BARALE: I th ink that U.S. businesses are hoping, and we
cer ta inly heard thi s from some of the business associat ions , tha t they are
very keen to see a BIT put in place , and they see that i t wi l l enhance
business opportuni t ies . And I guess speci f ical ly in the shor t - run that
whatever Bi lateral Investment Treaty i s negot iated, and let ' s assume that i t
has a negat ive l is t , we would assume that the negat ive l i s t on the BIT would
be an expansion, a s tep beyond the l im it s that we 've got in Schedule 9 of
China 's Pro tocol for Accession to the WTO.
So that there would be in the shor t - term, more opening up of
oppor tuni t ies . The concern I expressed earl ier about using a negat ive l is t i s
tha t those windows that open up for fur ther investment or l arger s takes in
part icular s tyles of investment would eventual ly serve as a l imitat ion , but
in the short - term, i t would mean that there would be some new
oppor tuni t ies opening up .
COMMISSIONER TOBIN: Thank you.
DR. EISENMAN: Well , thank you, Commissioner.
I think I 'm general ly going to punt , bu t before I do I want to associate
mysel f wi th the comments that were just made, which is to say that I th ink
there is a fear , and again I went in to th is in my wri t ten tes t imony, about the
negat ive l is t being a shor t - term bonus but a long - term inst i tut ional iza t ion
of res t r ic t ions, and that , you know, walk out of the room, okay, we got a
deal done, but then later when U.S. companies can ' t access those sectors ,
tha t 's al ready inked.
So we want to , I th ink, be cognizant of tha t and --
COMMISSIONER TOBIN: And before you punt ful ly, a re you punt ing
because you think i t would be unwise to proceed,or because you think i t
would have s igni f icant negat ive ef fect s , and i f so, negat ive effects on what?
DR. EISENMAN: Well , to be qui te honest wi th you, I 'm punt ing
because I don ' t know the answer.
COMMISSIONER TOBIN: Uh -huh.
DR. EISENMAN: I think i t ' s so broad, and we don ' t even know what
the shape of i t might look l ike so to pro ject what i t might do to the U.S.
economy is a s tep beyond what I think I 'm qual i f ied to speak to at this t ime.
So more out of modesty than out of concern at thi s point .
COMMISSIONER TOBIN: Okay.
DR. EISENMAN: But I ' l l cer ta inly look into i t and would be happy to
speak to you further about i t once I have more evidence.
COMMISSIONER TOBIN: Thank you.
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DR. EISENMAN: Thank you.
COMMISSIONER TOBIN: Thank you.
DR. KENNEDY: Last year , U.S. investment in China was about $3
bi l l ion. The U.S. has a $17.4 t r i l l ion economy. T hese investments in China
mat ter a lot to the speci f ic companies that are making them and to the
supply chains that they' re part of , and there could be s igni f icant benefi t s to
companies in some of those sectors and help those companies as they' re
adjust ing in the wake of adapt ing af ter the global f inancial cr is i s and t rying
to take bet ter advantage of the, you know, opportuni t ies tha t they have in
China and el sewhere.
Certainly for many companies that are invest ing in China, they' re not
using China as an export plat form as much as they used to . They're looking
at the Chinese market , and a Bi la teral Investment Treaty may be helpful in
them achieving that .
To the ex tent that American companies that are more profi table wisely
invest those profi ts in R&D and other t ypes of investment that benefi t
American workers or the American consumer , tha t 's , you know, something
for a di f ferent panel for those companies and what they do and o ther
considerat ions about American laws.
I would say thi s i s a lso connected to th e benchmarks that were asked
before about what we should be looking for . You know I think in addi t ion
to want ing the opportuni t ies to be able to invest in areas that have been off
l imits , and in addi t ion to want ing some s tabi l i t y, I think rea l ly what one of
the big goals tha t they want , that American business i s seeking and others ,
i s greater s tabi l i t y with acquir ing exis t ing Chinese companies , pr ivate
Chinese companies , s ta te -owned companies , and not just minori ty s takes
but majori t y s takes . And a BIT ma y help them.
I 'm just amazed that any t ime I ta lk wi th the American business
community here or in China, the BIT i s the ir number one pr ior i t y, tha t i s
the top of the l is t r ight now, and whether we th ink i t ' s go ing to have a huge
effect or a very smal l ef f ect or i t ' s awkward in the context of the problems
that we 're facing, that we see , i t ' s the number one priori t y.
COMMISSIONER TOBIN: Yes, I would agree , and i t seems l ike a lot
of eggs in one basket .
Thank you.
HEARING CO-CHAIR SLANE: Josh , I wanted to s tar t wi th you and
ask you your opinion on the St rategic Economic Dialogue that ' s been going
on for e ight or nine years . There are people who say we should cont inue
the dialogue with China, and th is is a posi t ive thing.
Other people are saying al l t alk , no act ion. We're just enabl ing the
Chinese to keep holding us off . They make commitments which they never
implement , and we should s top doing i t .
What are your thoughts?
DR. EISENMAN: Thank you, Commiss ioner .
That 's a di ff icul t quest ion , hone st ly. I mean general ly speaking when I
see al l o f these kind of spaghet t i bowl of dialogues that we 've created f rom
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al l o f these di fferent agencies , Track One dialogues, to say nothing of the
Track One-and-a-half , and the Track Two and the t rack whatever, I am just
general ly concerned that we 're not get t ing as much out of i t as we should,
and so I want to s tar t wi th that general s ta tement .
I be l ieve one of your recommendat ions in the 2014 Report was to look
at thi s i ssue . In fac t , the f i rs t recommendat ion was to evaluate - - I bel ieve
the--what --Congress ional Budget Service to evaluate this quest ion . So a t
this point , you know, having not done a review of th is par t icu lar dialogue,
i t 's hard for me to s i t here and say yes or no to your quest ion in an
authori tat ive way.
And i t ' s p reci sely because of tha t , I don 't think that or I have yet to see
what I would consider an authori tat ive repor t on the benefi t s of that
dia logue, and so that 's why I think that might be something the Commission
could put on i ts research agenda to help us bet ter understand and answer the
quest ion you 've put forward .
But I think that , genera l ly speaking, the ques t ion you 're ask ing is a
broader quest ion that goes beyond the part icular SED dialogue and i t goes
to a whole l i t any of dia logues that we have on a whole variety of issues that
we, I think , need to evaluate .
HEARING CO-CHAIR SLANE: Anybody el se?
DR. KENNEDY: Sure. I think i t ' s incredibly importan t that the U.S .
and Chinese leadership have s t ra tegic d ialogues wit h each other .
China is incredib ly importan t for what happens, posi t ive and negat ive,
in the world . Obviously, be ing the world 's only superpower , they ought to
care a lo t about what we think and what we do, and misunderstanding is
incredibly dangerous.
Unders tanding doesn 't mean you agree with each other; i t means you
also know where you disagree , and so I think s t rategic d ia logue, the more
these leaders can be together , the bet ter , and in addi t ion, these types of
meet ings also generate a lot of act ivi ty in the bureaucracies , and i t forces
our Cabinet members and thei r s taffs to focus and come with del iverables or
at least pay a t tent ion and learn about the other s ide and vice versa .
Chinese off ic ia ls are highly focused on the domest ic pol i t i cal sys tem
and f iguring out how to survive , avoid the ant i -corrupt ion campaign , avoid
get t ing on the bad s ide of others , and get t ing thei r tasks done. So to get to
them to focus for a l i t t l e whi le on the United States i s not a bad idea.
There is a good quest ion about whether the S&ED as i t i s current ly
const ructed i s the most ef fect ive way to do that . And i t ' s got ten bigger . It ' s
got ten larger . It ' s added grammar to the middle of the dialogue name. It ' s
got now two leaders on each s ide which makes i t chal lenging so there
defini tely is a worthwhile di scussion to be had about the form in which thi s
dia logue takes . But to me in general even i f i t doesn ' t lead to obvious l i s ts
of del iverables each t ime, which we can put on the front page of the paper ,
I s t i l l th ink i t ' s bet ter than looking at each other across the Paci f ic .
MS. BARALE: I would agree with that . I think the S trategic
Economic Dialogue and the o ther exchanges we have are important for
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put t ing on the table those issues , those i tems which we feel need to be
addressed. Whether we are successful a lways in put t ing i t forward or
get t ing some resul ts is another quest ion . But i t i s importan t to be able to
have some channels for put t ing those issues out there .
The other thing i s , especia l ly in prepara tory meet i ngs, as wel l as the
higher level meet ings, i t a l lows discuss ion to take place wi th a fai r amount
of t echnical i t y discussed , and not the broader general iza t ions that might be
associated wi th a more pol i t i cal discuss ion. Whether i t ' s IP or whether i t ' s
f inance and t reasury issues , i t i s necessary to be ab le to speak speci f ical ly
in the technical i t i es of tha t f ield . I think that is important for t rying to
es tabl ish communicat ion on these issues rather than hearing general
descript ions of what the discontent or the complaints are about .
HEARING CO-CHAIR SLANE: Jef f .
COMMISSIONER FIEDLER: Two quick quest ions . We were talking
ear l ier about certain ty and uncertainty, and China has always been an
uncertain place to do business on some level .
I 'm in terested in the impact , whatever you 've p icked up on the impact
of the ant i -corrupt ion campaign on bus iness operat ions and government
decis ion-making regarding business operat ions in the f i rs t instance.
And not completely coincidental ly, fore ign investment in the Uni ted
States that you made reference to earl ier - - I forget who i t was -- I th ink i t was
Dr . Kennedy who ment ioned -- I think i t was --no, you ment ioned the U.S.
investment in China . How much of Chinese investment in the United States
is capi tal f l ight?
MS. BARALE: I haven 't been in China for over s ix months so I don 't
have any f i rs thand d iscuss ions about how foreign companies are feel ing
about the ant i -corrupt ion invest igat ions . My secondhand reports are that
they are sensing in Chinese off ices a lo t of anxiety about how they should
be conduct ing themselves and how much contact they' re ab le to have to
some extent . This may be too anecdota l perhaps for you to draw
conclus ions, bu t - -
COMMISSIONER FIEDLER: You 've had a lo t of experience in China,
and younger people have had less because they' re younger , and the o ld
argument was that ant i -corrupt ion campaigns were always just s imply
fac t ional d isputes . This one s t r ikes me as - -
MS. BARALE: No.
COMMISSIONER FIEDLER: --as very much deeper , and more, l ess
fac t ional . It includes fact ional - -
MS. BARALE: Uh -huh.
COMMISSIONER FIEDLER: --vict ims, but tha t i t i s di f ferent . Do
you share my v iew of that?
MS. BARALE: The anecdotal , you know, what I 'm hearing secondhand
is tha t i t i s , i t 's reaching into more off ices a t more levels . I t 's something
dif ferent . It may be , as you say, in addi t ion to fact ional t arget ing, but there
are also at tempts to or ef forts to look at places where there 's corrupt ion, i f
there is corrupt ion in one part of a sys tem to take a ser ious l ook a t a wider
186
part of that agency or that sys tem, and that 's got a lot of people nervous,
whether or not they have been involved.
COMMISSIONER FIEDLER: You had the number two guy of the
NDRC who was just taken away.
MS. BARALE: Uh -huh.
COMMISSIONER FIEDLER: We're talking about a serious ly
importan t decis ion-making posi t ion v is -a-vis foreign business .
MS. BARALE: Uh -huh.
COMMISSIONER FIEDLER: And even domest ic bus iness .
MS. BARALE: No, no.
COMMISSIONER FIEDLER: That 's why I was wondering what kind
of , you know, react ion are the American businessmen having to the ant i -
corrupt ion campaign, and I think i t ' s going to go way --you know. What do
you guys say? What do you young guys say?
DR. KENNEDY: I need you to get on the phone wi th my sons after
this to let them know that their dad isn ' t a geezer .
COMMISSIONER FIEDLER: Well , everybody i s young to me now.
DR. KENNEDY: Thank you.
[Laughter . ]
DR. KENNEDY: The ant i -corrupt ion campaign I th ink is motivated by
several goals . The f i rs t i s in general to reduce the level of rent seeking,
not to e l iminate i t . There 's a lo t of ren t seekers al l the way at the top, but
to reduce the ex tent of i t , and so these cases , to some extent , have had that
effect .
The second is , you know, I think there is some fact ional element to
this , el iminat ing pol i t ical opponents jus t because they' re your pol i t i cal
opponents or the f r iends of your enemy. I think we could see some of those
cases .
And then I th ink the thi rd is to el iminate or push aside or weaken
ent renched interests that are going to be opponents of s tate -owned
enterpri se reform and other t ypes of reforms which wil l come down the l ine
but can ' t real ly make any progress unt i l you shake the sys te m up.
So this is real ly about tak ing things, shaking them up l ike a game of
Boggle and then hoping that once the board is rese t again, you 're in control
of i t and folks wil l l i s ten. I think that ' s the goal . The shor t - term
consequence is that everyone i s on pins and needles because they just don 't
know where the sword is going to drop.
Foreign companies are ex tremely nervous about th is and are inves t ing
a great amount in lawyers , so lawyers are benefi t ing t remendously to make
sure they don ' t vio late the Foreign Corrupt Pract ices Act and reexamine al l
of thei r pract ices in China and elsewhere, and I th ink that 's probably a good
thing.
It probably has cont r ibuted to the overa l l s lowdown in growth in these
numbers that we 've seen , 7 .4 , which i s probably not real ly 7.4 . Our 3 .0 is
much bet ter than thei r 7 .4 .
I think one of my concerns about the ant i -corrupt ion campaign, you
187
know, everyth ing in China is always done less focus on process and more
focus on outcome. The way thi s i s going forward , even though t hey spent
the Four th Plenum talk ing about rule of law and have a long l i s t of th ings to
do, you know, my sense about the, i f you real ly want to ge t corrupt ion
under cont rol long-term i s to bui ld the inst i tut ions of civi l society to
provide ex ternal account abi l i t y- -a press , independent courts , NGOs and
others . And this jus t reinforces that there 's one source of accountabi l i t y in
the count ry, and that 's the Communist Party.
So in the short - term, I think they make a lot of headway because Wang
Qishan and the others who are leading this , you know, leave no s tone
unturned, but in the long term what does i t mean? Wil l they be able to
sustain i t? Wil l thi s be the new normal? I 'm a l i t t le b i t dubious that that
wi l l be the pos i t ive outcome al though I recognize t he logic, given this t ype
of pol i t i cal sys tem, that they' re approaching i t in th is manner.
DR. EISENMAN: Thank you.
Fi rs t , jus t to take a s tep back for a moment and just qual i fy the
comments I made on the previous ques t ion. I think that when we look at a
dia logue, the S&ED dialogue, we should just be not overly opt imist ic . I
think over -opt imism would be our enemy in this case , and so I just want to
add that to my comments .
COMMISSIONER FIEDLER: Let me ge t my capi tal f l ight quest ion
answered here . An ybody got any idea?
DR. EISENMAN: Well , the Communis t Party has sa id that massive
amounts of money have lef t the count ry through corrupt off icials .
COMMISSIONER FIEDLER: What 's mass ive?
DR. EISENMAN: Oh, gosh. What was thei r number? Do you guys
happen to know? It was in the bi l l ions, but there i s a number - -
COMMISSIONER FIEDLER: Is i t the $280 bi l l ion that the Treasury
Depar tment couldn ' t f ind but wasn ' t worried about because they thought i t
might be coming here?
DR. EISENMAN: Well , I don ' t k now the answer to that , but I do know
that the Communist Party has a t one point put out a number al though at this
poin t I don ' t have i t on my person, but I can certainly t ry to fol low up with
you and get you the number that the Communist Party says has lef t the
count ry due to corrupt capi tal f l ight . Certain ly having l ived in Los Angeles
and Aus t in , you see a lot of Chinese money coming in, especial ly to the real
es tate sector .
It ' s anecdotal , but i t ' s certainly something that you can see with your
own eyes . So I do think that there is certain ly an i ssue of capi ta l f l ight , but
I do think i t ' s also an issue of development , that China has reached a level
where maybe al l the low-hanging frui t , not al l , bu t a good port ion of i t has
been picked, and now they' re looking for higher returns abroad. They're
looking to generate higher returns for thei r port fol ios .
COMMISSIONER FIEDLER: That is a very pol i te way of saying that
the closet i s ful l o f cash that I can ' t spend in China , and I 've got to get i t
out .
188
[Laughter . ]
DR. EISENMAN: Well , certainly there have been p lenty of those cases
which have come to l ight .
With regard to your ques t ion about t ransparent , about the ant i -
corrupt ion campaign, I would associate mysel f wholeheartedly wi th
Professor Kennedy's comments . And when we look at Transparency
In ternat ional 's recent rat ing of China, i t went f rom 80 to 100 in the middle
of - - I mean that ' s the biggest drop of any country in the world, in the mids t
of ant i -corrupt ion campaign , which set s t ransparency as one of i t s primary
object ives .
So that would suggest tha t those people who are experts on
t ransparency are not pleased wi th what they' re seeing. But I do th ink that
there is a fact ional element to this , and there 's been research done. I think
an Aust ral ian scholar looked at those people who were purged and where
they were associa ted with in terms of pol i t i cs and concluded that the
major i t y of those people who were taken out were f rom lower ends and the
people of h igh means, those people who would be consider ed in the Xi
cl ique have general ly been unscathed .
Now I haven ' t done a backup to see i f hi s research is correct or not , but
I would agree that there i s cer ta inly a fact ional element to this beginning
with the Bo Xilai case that we al l know and going, you know-- I won 't go
through al l the cases .
But I al so want to make an associat ion here between what we see in
corrupt ion and then other crackdowns going on in the rea lms of cul ture,
educat ion, propaganda, Internet control , the onl ine -- I mean you name i t .
I t ' s ge t t ing t ighter in China, and so , you know, there is thi s socia l is t theme
that i s being expounded upon not only in terms of the corrupt ion campaign
but in campaigns across a wide variety of sectors wi thin Chinese society
that we have not seen or at l ea st I haven ' t seen in my l i fet ime. The kinds of
res t r ict ions that are being put on are, you know, concerning, and I think
were refer red to by former Premier Wen J iabao in h is f ina l NPC when he
talked about how the possib i l i t y of a new Cultural Revolut ion wa s real , and
he was the premier . So he knew what he was ta lking about .
And when we see these things that are developing, they are suggest ive
that Premier Wen J iabao knew what he was talking about .
COMMISSIONER FIEDLER: Thank you.
HEARING CO-CHAIR SLANE: Thank you very much. It ' s been a
terr i f ic panel , very helpful . We appreciate everything, and with that , we ' re
going to conclude our hear ing.
[Whereupon, at 3:20 p.m. , the hear ing was adjourned .]